In a widely expected move, South Korea’s central bank on Thursday left its benchmark interest rate unchanged for April following last month’s surprise rate reduction.
In a monthly rate-setting meeting, the Monetary Policy Committee of the Bank of Korea held the base rate steady at a record low of 1.75 percent. The vote was split for a second straight month, with one of the board’s seven members voting for a rate cut.
“The monetary policy committee has cut the rate three times (since last August) and there is a need to observe its effect,” BOK Gov. Lee Ju-yeol said of the rate freeze in a press conference after the meeting.
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| Bank of Korea Gov. Lee Ju-yeol (center) presides over the Monetary Policy Committee meeting on Thursday, April 9, 2015. (Yonhap) |
“(Other considerations were that) we already lowered the rate last month and expanded the cap on the BOK’s lending facility. We also considered the need to be cautious of a recent sharp growth in household lending.”
Citing the need for additional measures to prop up growth, the policy committee had lowered the base rate to 1.75 percent from 2 percent in March. The central bank also heightened the cap on its lending program to 20 trillion won ($18 billion) from 15 trillion won last month.
The policy board turned slightly optimistic on the domestic economic front.
“Domestic demand activities, such as consumption and investment, appear to have improved,” according to the full text of its monetary policy decision. The board, however, sustained its view that sentiments “have not clearly recovered.”
Lee noted that circumstances for exports remain “rough,” with growth in China slowing and the Korean won relatively strengthening against other currencies, but expected the economy to gradually recover starting in the second quarter.
The top central banker, however, strongly denied views that “improved” domestic demand may be a signal for an additional rate cut.
“Consumption and investment seem to be livening up, according to February data. We have to see if the trend will continue. Viewing ‘improved’ circumstances as a sign of a rate cut is not logical.”
Lee said the central bank will continue to consider both macroeconomic circumstances and financial stability in implementing its rate policy, reiterating that it will not immediately start tracking the U.S. Federal Reserve’s rate normalization and rather rely on economic data.
The April rate freeze was in line with a poll by Yonhap Infomax, the financial news arm of Yonhap News Agency. A whopping 19 out of 20 analysts expected the BOK to stand pat on the rate to gauge the impact of previous rate cuts and monitor the growth of household debt, which continues to set new records.
Analysts were mixed on whether the central bank will further lower the rate in the coming months.
“Although the South Korean economy is facing challenges, it does not necessitate a back-to-back rate cut,” said Lee Sang-jae, an analyst at Eugene Investment & Securities Co.
“The central bank said its future policies will be data-dependent. If April’s economic data remain lackluster and the second-quarter GDP growth undershoots the target, another rate cut will be expected around June.”
Some analysts, however, played down the chances of an additional rate cut, citing economic recovery.
“While weak sentiment among market players has emerged as a major drag on the economy, it is also believed that indicators for the real economy are recovering,” said Lee Jae-hyung, an analyst at Yuanta Securities Co.
“As the government has rolled out various policies to bolster the economy, and the country’s main stock index has surpassed the significant 2,000-point level, the central bank is expected to take a wait-and-see stance through June.”
The BOK has implemented three rate cuts since the second half of last year — in August, October and March — in efforts to shore up growth in Asia’s fourth-largest economy, which is forecast to expand 3.1 percent this year, according to the BOK’s latest economic update.
The Korean economy has been going downhill in the face of economic headwinds. Its on-quarter growth, which reached 1.1 percent in the first quarter of last year, slowed to 0.5 percent in the second quarter and fell to 0.3 percent in the fourth quarter after slightly picking up to 0.8 percent in the third quarter. (Yonhap)
