Fri, Jul 14, 2017 page10

• Bank of Korea maintains policy rate, raises forecast

  OFF THE BANDWAGON: One reason for the central bank not to raise interest rates might be concerns over households’ ability to repay debt, analysts said

  • Bloomberg
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  South Korea’s central bank yesterday held its benchmark interest rate unchanged while raising its growth forecast as exports and plans for fiscal stimulus add to optimism for the nation’s economy.

  The Bank of Korea’s (BOK) policy board voted unanimously to keep the seven-day repurchase rate at a record-low 1.25 percent, as forecast by all economists surveyed by Bloomberg.

  Bank of Korea Governor Lee Ju-yeol said that GDP would expand 2.8 percent this year, exceeding the previous forecast of 2.6 percent and close to the nation’s potential growth rate.

  

  Bank of Korea Governor Lee Ju-yeol hits a gavel as he starts a monetary policy meeting in Seoul yesterday.

  Photo: Bloomberg

  Fiscal stimulus from the South Korean government could further boost the economy and was not included in the GDP estimate, Lee said.

  South Korean President Moon Jae-in is pursuing an 11.2 trillion won (US$9.8 billion) package as a key to generating more jobs, but the bill has made little progress in parliament.

  The bank needs to be sure the economy has clearly recovered before there can be any change in monetary policy, although the board agrees that the future bias is for its stance to become less accommodative, Lee said.

  He also said that while changes made by key central banks overseas are an important consideration, the board need not respond directly to moves by its foreign counterparts.

  “The change in growth forecast was in line with expectations, and shows that the BOK has a positive view on the economy,” said Stephen Lee, an economist at Meritz Securities in Seoul. “By saying that the BOK needn’t respond directly to policy changes by other central banks, the governor signaled a rate increase need not come soon.”

  Meritz predicted a 25 basis-point increase in the first quarter of next year.

  Lee Ju-yeol said inflation would fluctuate around 2 percent for some time and that the central bank has not changed its 1.9 percent projection for price changes.

  “His comments can be seen as hawkish, and he again signaled that the direction is for a rate increase,” NH Investment and Securities analyst Park Jong-youn said. “The key would be when it decides to raise.”

  Lee Ju-yeol said at a news conference that the board has no specific timing in mind.

  Most analysts see the bank staying the course through the end of this year, out of concern that higher rates would pose a risk to the recovery and add to consumers’ repayment burdens at a time of record household debt.

  The government’s policies should be the key tool to curb debt growth, rather than higher rates, Lee Ju-yeol said.

  The central bank last month said in a semi-annual financial stability report that while an incremental rise in the lending rate would not hurt consumers’ ability to meet payments much, a rapid rise in a short time would lead to relatively large increase in the number of households at risk.

  The won appreciated 0.8 percent against the US dollar to 1,136 won as of 1:40pm yesterday.

  The yield on five-year government bonds declined 2 basis points to 1.93 percent.
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