South Korea’s central bank held its key interest rate at a record low as board members deferred further policy action until they have a clearer picture of the economy’s path.
The decision to keep the seven-day repurchase rate at 1.25% was forecast by all 19 economists surveyed by Bloomberg. All seven board members agreed on the decision, which came after a unanimous vote for no change in July and a surprise cut of 25 basis points in June.
With inflation far from the 2% target, the won relatively strong and exports struggling, the BoK has reasons to ease, economists said. Yet they had forecast that governor Lee Ju Yeol would opt to save what ammunition he has left to respond if conditions worsen. Some recent data, including gross domestic product growth, were better than expected and reduced the urgency of making a change.
“Today’s decision was largely expected as the BoK would want to monitor the impact of June’s rate cut and the supplementary budget,” said Park Jong Youn, a Seoul-based fixed-income analyst for NH Investment & Securities Co. “Still, I don’t think those policies will be enough to offset downside risks to growth, and I expect a cut in October, especially if won strength continues.”
Lee said in a press briefing that monetary easing has brought South Korea’s key interest rate close to a so-called lower bound, theoretically, but that the BoK still has policy room. South Korea’s lower bound for interest rate needs to be higher than key-currency countries, Lee said, adding that the central bank isn’t at the stage of considering zero rates or quantitative easing.
Of 27 analysts surveyed by Bloomberg from July 15 to July 21, 16 expected at least one more rate cut within the year. The rest of the analysts forecast no change in the benchmark rate.
The economy is improving on the back of domestic demand, and that modest recovery is expected to continue mainly due to expansionary policies, the central bank said. However, the export slump continues and there are “considerable uncertainties” around that assessment, according to statements released by the bank. South Korea’s won ended a five-day rally yesterday, weakening 0.5% to 1,100 per dollar as of 12:28pm in Seoul. The currency has been the best performer in the region in the past month. Its strength puts pressure on exporters already struggling from weaker global demand.
Lee said he isn’t concerned about speculative herd behaviour in the currency market now, but the bank will closely monitor for such trends. While currency has less impact on exports than in the past, won strength adds to the burden of low inflation and exports, Lee said.
South Korea’s Vice Finance Minister Choi Sang Mok said on Wednesday – when the won closed at the strongest level since May 2015 - that authorities would take action if excessive herd behaviour was seen.
South Korea’s three-year government bond yield rose one basis point to 1.23% yesterday, Korea Exchange prices show.