Bank of Korea Holds Rate Steady, Sees Slightly Faster Growth

Korean won
  • Bank of Korea Holds Rate Steady, Sees Slightly Faster Growth

South Korea’s central bank held its key interest rate steady on Thursday, saying economic growth continued to recover as exports and investment improve.

In its policy statement, the Bank of Korea said the economy would grow slightly faster than the 2.5 percent projected in January, while inflation would just exceed its previous forecast of 1.8 percent. It didn’t provide new figures in the statement.

The BOK said the global economic recovery has expanded, but the pace of improvement in exports and domestic demand is expected to be limited, citing uncertainty over trade relations and weak improvement in households’ real purchasing power.

Citing contained inflation, the BOK said it would maintain its accommodative policy stance while also monitoring geopolitical risks, household debt and the Federal Reserve’s policy normalization.

The central bank releases an updated quarterly economic outlook for 2017 later Thursday.

“Positive exports in the first quarter seems to be behind the BOK projecting higher growth, but I think the economy probably has passed its peak,” said Park Jong-youn, a fixed-income analyst for NH Investment & Securities in Seoul. “With China limiting tourism to South Korea, unless oil prices rise fast, the pace of economic growth will be gradual.”

The decision to keep the seven-day repurchase rate at a record-low 1.25 percent, unchanged since June 2016, was forecast by all 23 analysts surveyed by Bloomberg.

The central bank may be set to continue its pause for a while longer. Record household debt and the Federal Reserve’s tightening reduce the likelihood of further easing in Korea, while a rate hike would add to the repayment burden of many consumers. The debt hit 1,344 trillion won ($1.2 trillion) at the end of last year, a level the central bank already sees as limiting consumption.

Governor Lee Ju-yeol will speak to the media later today, and investors will scrutinize his comments on the possible market impact of rising geopolitical tensions, as well as the likelihood of the country being labeled a currency manipulator by the U.S. Treasury this month.

Finance Minister Yoo Il-ho said this week that the economy performed better than expected in the first quarter as exports, production, and investment all recovered. Overseas shipments, which account for about half of Korea’s gross domestic product, expanded for a fifth month in March, and inflation accelerated at the fastest pace in almost five years.
Retail sales rose in February from the previous month, when they contracted.

The won has weakened about 1.5 percent in April, the biggest loss among Asian currencies, as investors worried the U.S. may consider military action to contain North Korea’s nuclear ambitions. The finance ministry said Wednesday that capital flows remain stable but authorities will take prompt action if that changes. Lee has previously said North Korea tensions have a limited impact on markets.

Of 27 analysts surveyed by Bloomberg, 21 forecast no change in the policy rate for the rest of the year. Three see a cut to 1 percent, while three see an increase to 1.5 percent.

About the Author

Samed Olukoya
CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and, with over a decade long experience in the global financial market. Contact Samed on Twitter: @sameolukoya; Email: [email protected]

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