Korea Holds Rate at Record Low Amid Rising Debt, Capital Outflow

The Bank of Korea held the benchmark interest rate unchanged for a ninth month amid concern that another cut could aggravate risks from rising debt levels and capital outflows.

The decision to keep the seven-day repurchase rate at a record low 1.5 percent was forecast by 11 of 18 economists in a Bloomberg survey. The remaining seven expected a 25 basis point cut. DBS Group, HSBC Holdings and Goldman Sachs Group were among those who forecast no change Thursday but expect a move next quarter.

While South Korea also faces risks to growth from falling exports and weakening domestic demand, the bar to further easing is higher for Governor Lee Ju Yeol and the majority of the policy board owing to record-high household debt and the uncertain global outlook.

“The increase in capital outflows and heightened Volatility in the won would dissuade the BOK,” Ma Tieying, an economist for DBS, said before the decision. “We expect the BOK to take action in the second quarter, cutting the benchmark rate by 25 basis points to 1.25 percent.”

Some board members said at the Feb. 16 policy meeting that the bank should save policy room to prepare for heightened economic uncertainty. The sole dissenter, Ha Sung Keun, said then that falling exports would hurt production, income, and consumption.

Growth Forecast

The central bank’s most recent forecasts are for 3 percent growth and 1.4 percent inflation for 2016. It releases new projections next month.

Thursday’s meeting was the second-to-last gathering for a rate decision before four of seven board members leave on April 20, as their terms end. Among those who will leave are Moon Woo Sik, known to be the most hawkish, and Ha, the most dovish.

Foreign investors withdrew $152 million from Korean bonds and $1.4 billion from stocks this year as of March 9 amid uncertainty in emerging markets and rising tensions with North Korea. The finance ministry and central bank intervened verbally to steer investors on Feb. 19 and were suspected of having sold dollars in the market as the won traded at the weakest level in more than five years amid capital outflows and rate-cut bets.

The won has weakened 3.6 percent against the dollar this year, making it one of the worst performers among regional peers. The Yield on three-year government bonds fell 19 basis points this year to 1.48 percent when local markets closed on Wednesday.

--With assistance from Myungshin Cho To contact the reporters on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net, Cynthia Kim in Seoul at ckim170@bloomberg.net. To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Jodi Schneider

By: Jiyeun Lee and Cynthia Kim

©2016 Bloomberg News