BOK freezes key rate at 1.5% for Aug.

By Yonhap
  • Published : Aug 31, 2018 - 10:01
  • Updated : Aug 31, 2018 - 13:37

South Korea's central bank on Friday froze its policy rate for August on sluggish economy data and low inflation pressure.

The monetary policy board of the Bank of Korea voted to keep the policy rate unchanged at 1.5 percent as widely expected.

The BOK has taken a wait-and-see stance since November last year, when it adjusted up the key rate for the first time in more than six years, citing the economic recovery.

Gov. Lee Ju-yeol said the July decision was not unanimous as Lee Il-houng, part of the seven-member board, voted for a 0.25 percentage-point increase.

The hawkish member had also demanded a rate hike at the July meeting.

"Going forward the board expects domestic economic growth to be generally consistent with the path projected in July and sustain a rate at its potential level," the BOK said in a release.

Last month, the BOK revised down its 2018 growth forecast to 2.9 percent from 3 percent, citing rising economic uncertainties at home and abroad. But it added that the economy is still on the right track to meet the potential growth rate.

"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," it added.

Poorer-than-expected economic data seemingly is making the BOK take more cautious steps, although many analysts expect at least one rate adjustment in the remaining months of 2018.

Bank of Korea Gov. Lee Ju-yeol(Yonhap)

Statistics Korea said earlier Friday that a leading business cycle indicator dropped for the second consecutive month to reach 99.8 in July. It is the first time that the indicator fell below the 100 level since August 2016, raising concerns that Asia's fourth-largest economy has already entered a downside cycle.

Facility investment, one of the leading economic drivers, continued to decline, falling 0.6 percent on-month in July to follow a 7.1 percent on-month drop in June, marking a decline for five straight months for the first time in 20 years.

Sluggish employment data also backed the pessimism, as the number of jobs newly created in July came to 5,000, the smallest on-year gain since January 2010.

Consumer price inflation has been hovering around 1.5 percent for three months in a row through July, far lower than the BOK's target of 2 percent.

At the same time, the central bank has to consider the fact that a rate hike may place a heavier burden on borrowers. South Korea's household debt is on a steady rise and reached a record 1,493 trillion won (US$1.34 trillion) in the second quarter of this year.

Moreover, uncertainties are building around the world due to the possibility of a trade war between the United States and China. The world's two largest economies are South Korea's No. 1 and No. 2 trade partners.

Exports, the country's key economic driver, have been swinging for months. Outbound shipments retreated 0.3 percent in June but rebounded 6.2 percent in July.

However, some watchers still said the widening rate difference between South Korea and the US will force the BOK to raise the key rate in October or at the very least in November.

Following the Fed's latest increase in June, South Korea's base rate stands at 1.5 percent, compared with the US range of 1.75-2 percent.

If the Fed complies with its earlier schedule, the US central bank will likely lift its fund rate by a quarter percentage point in September.

A widening rate spread could spark an outflow of foreign investment from South Korea, where foreigners hold more than 30 percent of all stocks in the market.

Also, Seoul's central bank wants to have a higher key rate in a bid to secure wider policy space to better deal with a possible economic downturn in the future.

The BOK said it will closely check economic data and an inflation trend, and judge carefully whether to adjust its accommodative monetary policy stance further.

Gov. Lee has repeatedly said the central bank plans to take action once the economy expands in line with the potential growth rate and the consumer price reaches target inflation levels.

"Many are concerned that the economy is slowing down on poor jobs data and dampening external circumstances," he said. "I know there are higher downside risks, but the economy is on the right path to meet expectations."

He added that the central bank will put reducing financial risks caused by a protracted low borrowing rate on the front burner in the coming months. (Yonhap)

Related Stories