Bank of Korea Holds Rate as Geopolitics Muddies Outlook

  • Policy rate has been at record low 1.25% since June 2016
  • BOK sees growth and inflation continuing as forecast in July

Bank of Korea Expects to Hit 2.8% GDP Forecast

South Korea’s central bank held its key interest rate as the board monitors how risks from North’s missile tests and the government’s tightening of property market rules are affecting the economy. 

The unanimous decision to keep the seven-day repurchase rate at a record-low 1.25 percent on Thursday, unchanged since June 2016, was forecast by all analysts surveyed by Bloomberg.

Korea’s economy looks to be on solid footing but there are risks to the outlook. The government’s steps to stop property speculation and slow rising debt may hurt construction, and heightened tension surrounding North Korea’s provocations is rattling markets.

"Governor Lee’s comments on the persistent accommodative policy leading to more debt can be seen as a signal that the direction for policy rate is a hike," according to Kim Sang-hoon, a fixed-income analyst at KB Investment & Securities Co. Still, "the BOK sounded less confident on the economy compared with the past," he said.

"A slowdown in household debt growth due to government policies can ease financial stability risks and reduce the urgency to adjust the accommodative monetary policy stance," Governor Lee Ju-yeol said at a press conference after the decision. "But looking at South Korea’s household debt situation now, a prolonged accommodative policy stance can worsen imbalances and I think efforts to curb debt growth need to be continued." 

South Korea’s household debt rose to a fresh record at the end of June, underscoring the challenges the government faces in curbing loan growth and cooling the property market. Governor Lee has previously said the central bank board agrees the bias is for a less accommodative policy, but that a clear economic recovery should precede any rate hike.

Growth Expectations Unchanged

The BOK expects growth and inflation to be in line with the July forecasts, it said today in a statement. It will maintain its accommodative monetary stance because inflationary pressures are not expected to be high, although the domestic economy will have "solid growth," according to the statement.

Lee Ju-yeol on Aug. 31.

Photographer: SeongJoon Cho/Bloomberg

"There have been significant developments since July that can have an impact on South Korea’s economy. While a global recovery and implementation of the extra budget can have positive effects, downside risks from North Korea are rising," Lee said, adding that it’s hard to judge how big the impact of North Korea will be.

The central bank will not hike rates in the next six months, according to a note from Trinh Nguyen, senior economist at Natixis Asia, writing that a continued escalation of the crisis in North Korea warrants the bank staying on hold until the first quarter of 2018. "Low interest rates, loose fiscal policy and a cyclical global trade upturn will support short-term growth in South Korea of above 2.5 percent." 

South Korea’s won weakened 0.1 percent on Thursday to 1,125.60 per dollar as of 12:29 p.m. in Seoul. The yield on three-year government bond rose one basis point to 1.76 percent.

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