Korea Holds Rate at Record Low Amid Debt, Capital Outflows (1)

The Bank of Korea held the benchmark interest rate unchanged for a ninth month amid concern that another cut...

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’s economy should continue to grow, weakness in emerging economies is weighing down exports and domestic demand is on a downward trend, the central bank said in statements following the policy decision. Record-high household debt and capital outflows remain areas of concern.

“The BOK is waiting for the best timing for a rate cut and March wasn’t right considering the uncertainty in financial markets,” said Park Jong Youn, a Seoul-based fixed-income analyst for NH Investment & Securities Co. “The bank’s assessment of the economy is still negative, so I expect a cut next month as market volatility eases.”

The won snapped two day’s of declines, strengthening 0.3 percent to 1,212.41 per dollar as of 11:03 a.m. in Seoul. The yield on three-year government bonds rose three basis points on Thursday to 1.50 percent.

Growth Forecast

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.

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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.

(Updates with economist comment in fourth paragraph, markets in fifth.)

–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

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