Bank of Korea Raises Growth Forecast, Keeps Rates Steady

  • Benchmark borrowing cost held at record-low 1.25% as forecast
  • Economic growth this year is expected to reach 2.8 percent

Bank of Korea Holds Key Rate at 1.25%

South Korea’s central bank held its benchmark interest rate unchanged on Thursday while raising its growth forecast as exports and plans for fiscal stimulus add to optimism for the economy.

The Bank of Korea’s policy board voted unanimously to keep the seven-day repurchase rate at a record-low 1.25 percent, as forecast by all economists surveyed by Bloomberg. Governor Lee Ju-yeol said gross domestic product will expand 2.8 percent this year, exceeding the previous forecast of 2.6 percent, and close to the country’s potential growth rate.

He added that fiscal stimulus from the government could further boost the economy and wasn’t included in the GDP estimate. President Moon Jae-in is pursuing an 11.2 trillion won ($9.8 billion) package as a key to generating more jobs, but the bill has made little progress in parliament. 

The BOK needs to be sure the economy has clearly recovered before there can be any change in monetary policy, though the board agrees that the future bias is for its stance to become less accommodative, according to the governor. He also said that while changes made by key central banks overseas are an important consideration, the board needn’t respond directly to moves by its foreign counterparts.

"The change in growth forecast was in line with expectations, and shows that the BOK has a positive view on the economy,” said Stephen Lee, an economist at Meritz Securities in Seoul. "By saying that the BOK needn’t respond directly to policy changes by other central banks, the governor signaled a rate increase need not come soon.” Meritz sees a 25 basis-point increase coming in the first quarter of 2018.

Inflation Outlook

Governor Lee said inflation will fluctuate around 2 percent for some time and that the BOK hadn’t changed its 1.9 percent projection for price changes.

“His comments can be seen as hawkish, and he again signaled that the direction is for a rate increase,” said Park Jong-youn, an analyst at NH Investment and Securities. “The key would be when it decides to raise.” The governor noted in his press briefing that the board has no specific timing in mind.

Most analysts see the BOK staying the course through the end of this year, though, out of concern that higher rates would pose a risk to the recovery and add to consumers’ repayment burdens at a time of record household debt.

Curbing Debt

Lee said the government’s policies should be the key tool to curb debt growth, rather than higher rates.

The central bank said last month in a semi-annual financial stability report that while an incremental rise in the lending rate would not hurt consumers’ ability to meet payments much, a rapid rise in a short time would lead to relatively large increase in the number of households at risk.

The won appreciated 0.8 percent against the dollar to 1,136 as of 1:40 p.m. on Thursday. The yield on five-year government bond declined two basis points to 1.93 percent.

— With assistance by Myungshin Cho

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