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BOK holds key rate steady at 1.50% in Feb.

South Korea's central bank on Tuesday kept its key rate unchanged for the second month in a row as Asia's fourth-largest economy experiences slow growth momentum.

In a widely expected move, the monetary policy board of the Bank of Korea voted to hold the key rate steady at 1.50 percent, maintaining its wait-and-see stance.

In November last year, South Korea's central bank adjusted up the key rate for the first time in more than six years, citing signs of economic recovery.

The decision to freeze the rate had been widely expected as BOK Gov. Lee Ju-yeol had stressed that he would keep monetary policy accommodative to support economic growth further.

It was Lee's last rate decision before his term ends in mid-March.

Gov. Lee said the Board reached the agreement to hold the rate at 1.5 percent by a unanimous show of hands.

"As it is forecast that inflationary pressures on the demand side will not be high for the time being while the domestic economy is expected to continue its solid growth, the Board will maintain its accommodative monetary policy stance," the BOK said in a statement.

BOK Gov. Lee Ju-yeol (Yonhap)
BOK Gov. Lee Ju-yeol (Yonhap)

"Through this process it will carefully judge whether it is necessary to adjust its accommodative monetary policy stance further, while closely checking future economic growth and inflation trends," it noted.

The central bank said the country's economy is expanding as anticipated on the back of moderate improvement in consumption and exports, slightly offset by a decrease in facility investment and construction investment.

"The Korean economy is sustaining its trend of solid growth," it said. "However, growth in facilities investment is slowing from the high rates seen last year, and construction investment continues its phase of adjustment."

Market watchers said the South Korean economy will face intensifying downside risks this year, including trade pressure from the United States and potential fallout from ongoing corporate restructuring efforts.

The South Korean government and the BOK forecast that its economy will expand 3 percent in 2018, similar to the 3.1 percent growth in 2017, but there are some pessimistic outlooks that point to numbers dipping as low as 2.6 percent.

"A strengthening of US protectionist trade policies, accelerated monetary normalizations in major countries and the restructuring of in the automobile sector are among the risks the country is facing," said the BOK.

GM Korea, the local unit of the US carmaker, shut down its underutilized plant in Gunsan, 270 kilometers southwest of Seoul, and seeks ways to pull out of the Korean market. At the same time, the South Korean government is considering whether or not to inject fresh funding to help the company continue its Korean operation.

Washington plans to impose anti-dumping tariffs of up to 50 percent on large washing machines and solar cell imports from South Korea. The US Department of Commerce has also proposed punitive tariffs for South Korean steel products.

Gov. Lee said such downside issues are not serious enough to affect the economic growth tendency for the time being, but it will closely check the longer-term effect.

"The effect of the shutdown of the GM Gunsan plan will not really have direct impact on the Korean economy as a whole," he said. "But if the plant closure expands further and the US pressure broadens to our key industrial products, then it could be a big blow to the Korean economy."


Also, the US Federal Reserve will likely speed up its monetary tightening schedule, as the world's largest economy is showing clear signs of recovery.

Currently, South Korea and the US have similar base rates, as the Fed recently adopted an interest rate range of 1.25 percent to 1.50 percent. If the US central bank raises the rate by a 0.25 percentage point next month as expected, South Korea will have a lower interest rate than the US for the first time in more than 10 years.

Market insiders point out that a lower rate may spark an outflow of foreign capital in South Korea, as foreign investors may seek higher proceeds based on interest rates.

But Lee emphasized that a sudden foreign outflux will not happen immediately, saying, "Foreign outflow has been caused not only by the interest rate spread, but also by economic conditions, inflationary trends, foreign exchange and risk appetite in the global financial market."

Moreover, the central bank is concerned about a record high household debt of 1,450 trillion won ($1.35 trillion) as of December last year, noting that it is watching its upside pace.

"Household lending has shown a higher rate of expansion than in past years, although the degree of its expansion has continued to decline," it said. "Housing prices have shown low rates of increase overall, but have risen faster in some parts of Seoul and surrounding areas."

Meanwhile, the central bank chief said the PyeongChang Winter Olympics, which closed Sunday after a 17-day run, will push up the local economy beyond expectation.

In its economic forecast, the BOK anticipated that the Olympics will boost private consumption by 0.1 percentage point during the first quarter of this year.

"We'd predicted a 0.1 percent rise in first quarter growth, but I heard that we didn't catch some 900 billion won in managing costs during the Olympic period," said Lee. "I can't say the exact effect of it, but there should be an additional gain in growth." (Yonhap)

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