Bank of Korea Keeps Interest Rate Steady at 1.5 Percent

The Bank of Korea has left its key interest rate untouched on Tuesday, meeting the observer’s expectations and taking note of muted inflationary pressure. It also showed caution ahead of any further monetary tightening from the US Federal Reserve policy meeting, which will be held on March 20-21.

The Bank of Korea says that it still needs to assess growing protectionist measures and uncertainties abroad.

The members of the Monetary Policy Board voted to keep the 7-day repurchase rate at 1.50 percent in the last rate decisions before Governor Lee Ju-yeol’s term expiry, which will be in March.

 “We kept the base rate unchanged today as there is a need to closely examine growing protectionist measures and uncertainties abroad, although the local economy is expected to keep firm growth on the back of improvements in the global economy,” said Lee in the conference held on Tuesday.

He also said that demand-side inflationary pressures were expected to remain low as well, and that expectation also contributed to their decision.

A recent survey showed that all 14 economists who participated predicted that the central bank would keep its benchmark interest rate unchanged. During this time, they will be assessing the effects of the November rate rise, as well as the global economic conditions.

Meanwhile, among the 14 participants, 8 said that they expect the Bank of Korea to lift rates in May, while the rest said that they expect another rise later.

The anticipated decision moved the markets only a bit, with the won rising 0.3 percent against the dollar. March futures on 3-year Treasury bonds hardly moved at 107.73.

Challenges

President Moon Jae-in is set to nominate a new governor for the Bank of Korea

The South Korean economy started 2018 on a high note. Exports benefited from booming global demand. However, policymakers found themselves struggling to alleviate trade friction that the United States stoked by Donald Trump’s “America First” policy.

America’s Commerce Department recommended Trump imposed high curbs on steel imports, and this included those from South Korea. This came after it slapped higher taxes on washers and solar panels in January. Additionally, there is the lingering risk that a strong won would negatively affect the country’s export competitiveness. 

Those challenges will welcome Bank of Korea’s new governor, who should be nominated by President Moon Jae-in prior to Lee’s term ending on March 31. The new governor will have to take on the challenge of raising interest rates without hurting growth or weakening household consumption, which is already knee-deep with record debt.

“Given all eyes are with the Fed, and as worries about exports are growing, the rate decision probably was an uneventful process. It is also Governor Lee’s last,” said Yoon Yeo-sam, who is a fixed-income analyst at Meritz Securities.

Yoon believes that the Bank of Korea will raise interest rates in the second half of 2018, while the nation’s financial markets will stay calm even if the Fed raises interest rates. 

“Unless the policy rate differential between South Korea and the US is as wide as 100 basis points, it will be OK and we won’t see major capital outflows,” said Yoon.

The central bank raised the base rate by 25 basis points in November, and that was its first tightening in 6 years. The bank predicts that the economy will expand 3.0 percent this year, slightly slower than 2017’s 3.1 percent. 

During the fourth quarter of last year, the South Korean economy surprisingly shrank. Struggling car exporters and industrial production failed to keep up with the previous quarter’s stellar pace, posting their worst performance in almost a decade.

In January, inflation eased to 1 percent, which is the slowest in 17 months, decelerating from the December’s 1.5 percent. These indicators support the consensus that the central bank’s monetary tightening will be gradual this year, with export and investment-led growth moderating after the quick expansion last year.

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