South Korea’s central bank froze its key interest rate at a record low of 1.5 percent Thursday as it apparently kept its wait-and-see stance to digest the effect of a looser monetary policy and stimulus measures amid rising market volatility.
The widely expected move by the Bank of Korea marked the second consecutive rate freeze following a quarter-point cut in June. The BOK has conducted four rate cuts in the past 12 months, trimming a full percentage point off the base rate.
 |
| (Yonhap) |
“(The Monetary Policy Committee) decided to leave the key rate at the current level, given budding signs of an economic recovery and increased market volatility,” BOK Gov. Lee Ju-yeol said in a press conference. “The decision was unanimous.”
The economy is expected to gradually recover on the back of expansionary policies and the end of the Middle East Respiratory Syndrome outbreak, the top central banker said.
But the volatility of the financial market has sharply increased amid expectations of a U.S. rate hike and China’s currency devaluation, with household debt also growing, Lee said.
The June rate cut was aimed at fending off the economic fallout from the MERS outbreak. The respiratory disease hampered consumption, prompting the central bank to lower its annual growth forecast to 2.8 percent from 3 percent.
Shortly after the rate-setting meeting, the committee said there are signs improvements in consumption and the economic unit’s confidence after the government declared a de facto end to the MERS outbreak that has claimed 36 lives and sickened 186 people.
The MERS scare has also dampened consumer spending, dealing a blow to the already sputtering economy. In order to breathe life into consumer spending and the economy, the government has come up with an 11.53 trillion-won ($9.8 billion) extra budget.
“Exports have continued their trend of decline, but consumption and the sentiments of economic agents appear to have improved,” the policy committee said, noting the government announcement last month that declared the de facto end of the illness.
Still, the policy committee said it judges the “uncertainties surrounding the growth path to be high.”
Lee said those uncertainties are more likely to come from overseas, such as increased volatility in the global financial market and economic uncertainties in China.
Regarding the risks, the BOK governor said the central bank will closely monitor the financial market to minimize risks, especially focusing on fund outflows by foreign investors.
He said while such a capital outflow will likely be “limited” due to the country’s relatively strong fundamentals, it is too hasty to rule out the chances of Chinese market woes spilling over here.
The Thursday decision is in line with a poll by Yonhap Infomax, the financial news arm of Yonhap News Agency. All 11 analysts and economists projected a rate freeze, citing the need to gauge the impact of previous rate cuts and the government’s household debt measures.
The poll was conducted before China’s devaluation moves.
Four of the polled analysts and economists, however, projected that the BOK may deliver an additional rate cut later this year if sluggish exports and weak domestic demand hinders the expected growth path.
On top of MERS-related losses, Asia’s fourth-largest economy has been suffering from a fall in exports due to the won’s rise and overall weak global demand.
Exports slumped 3.4 percent on-year in July, with cumulative shipments in the first seven months of this year also declining 4.9 percent from the previous year, according to customs data.
The blitzkrieg devaluation of the yuan is further feared to hurt exports, raising the price of Korean products sold in China and discouraging tourists from visiting the country due to higher costs. China is the country’s biggest trading partner.
The move has already roiled the local financial market, with the Korean won sinking to a four-year low of 1,192.8 against the dollar on Wednesday. The stock market also plunged below the psychologically significant 2,000-point level. (Yonhap)
