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Bank of Korea freezes base rate at 1.75%, citing uncertainties

South Korea’s central bank on Friday froze the key interest rate at 1.75 percent, leaving the rate unchanged for six consecutive months, amid lingering concerns over weakening economic growth and rising global risks.

The Bank of Korea’s Monetary Policy Board voted to leave the rate unchanged, with Gov. Lee Ju-yeol reiterating that now is not the time for a rate cut considering macroeconomic conditions and financial stability.
 
Bank of Korea Gov. Lee Ju-yeol (Yonhap)
Bank of Korea Gov. Lee Ju-yeol (Yonhap)

“Expectations for a base rate cut seem to be emerging, given concerns over the negative direction of the US-China trade war,” Lee said in a press conference following the BOK’s monetary policy decision. 

“However, monetary policy is set based on a comprehensive consideration of macroeconomic conditions and financial stability. Now is not the time for a rate cut,” he said.

The decision was not unanimous as one board member sought a rate cut by 25 basis points, according to the BOK.

Despite a surprise contraction in the first quarter, Korea’s economy is on track for a recovery, buoyed by improved exports, increased capital investments and government policies aimed at economic revitalization, Lee said.

There has been some speculation of a rate cut, as the escalating US-China trade war has been hurting global demand for Korean exports while private consumption continues to weaken.

The scenario, however, was turned down as a rate cut at this point was seen as further devaluing the Korean won against the US dollar.

Korea’s export-reliant economy has been suffering from sluggish exports, slowing capital investment and weakened private consumption amid deepening US-China trade tensions.

The developments have also contributed to driving down the value of the won. The won-dollar exchange rate currently sits at above 1,100 won to the greenback, with concerns that the rate may soon exceed the 1,200 won mark.

Responding to concerns over the won’s falling value, the BOK chief said that “exchange rates are not determined by the base rate alone,” pointing out that the foreign currency market is affected by global risks, such as the ongoing US-China trade talks, as well as countries’ financial soundness.

As for the domestic economy, the BOK judges that it has recovered slightly from its slowdown in the first quarter as consumption has grown, albeit slowly, despite a slowdown in facilities and construction investment.

“Going forward the board expects the domestic economy will grow at a rate that does not diverge significantly from the path projected in April,” the BOK said in a statement.

Looking ahead, the central bank pledged to “conduct monetary policy so as to ensure that the recovery of economic growth continues and consumer price inflation can be stabilized at the target level over a medium-term horizon, while paying attention to financial stability.”

Last month, the BOK revised this year’s growth outlook to 2.5 percent, down 0.1 percentage point from its earlier projection in January, citing economic uncertainties and weakened exports. The consumer price forecast was also reduced to 1.1 percent, down 0.3 percentage point.

Asia’s fourth-largest economy expanded 2.7 percent in 2018, down from 3.1 percent in the previous year.

By Sohn Ji-young (jys@heraldcorp.com)
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