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BoK keeps rate at record low amid market turbulence

epa05163613 Bank of Korea (BOK) Governor Lee Ju-yeol chairs the Monetary Policy Board meeting in Seoul, South Korea, 16 February 2016. The board held the key rate at 1.5 percent for February, a widely anticipated move, keeping it at a record low for the eighth consecutive month.  EPA/YONHAP SOUTH KOREA OUT

Bloomberg

The Bank of Korea (BoK) kept its key rate unchanged Tuesday for an eighth consecutive month as it waits for a clearer picture of first-quarter data and assesses the impact of unstable markets.
The decision to keep the seven-day repurchase rate at a record low 1.5 percent was forecast by all 15 economists in a Bloomberg survey.
South Korea’s government bond yields fell to record lows last week after Japan’s adoption of a negative interest-rate policy and the Federal Reserve’s signal that it will delay rate increases. These events have supported thinkingthat the BOK may soon further ease monetary policy. Economists at Barclays Plc and Australia & New Zealand Banking Group Ltd. are among those forecasting a rate cut in March.
“The board needs some time to evaluate January economy data and to gauge the impact of financial market uncertainties,” Chang Jae Chul, a Seoul-based economist for Citigroup Inc., said before the decision was announced. “My baseline scenario is for a cut in April, but the possibility for a change in March is rising. There are concerns about a looming global recession.”
Korea’s won has weakened 3.4 percent this year versus the dollar, making it one of the biggest losers among Asian currencies.
The yield on three-year government bonds fell 19 basis points during the same period to 1.48 percent as of 9:19 a.m. Seoul time on Tuesday.

Export Weakness
South Korea’s exports fell 18.5 percent in January, the biggest drop since 2009, as global demand and especially that from neighboring China waned. Consumer prices rose 0.8 percent, the slowest pace since September and far below the central bank’s latest 2 percent target. Other key data for January including industrial production and retail sales will be released later this month or in March.
With exports expected to remain sluggish, Korea’s policy makers are relying on domestic demand to shore up growth. The finance ministry said it will front-load more fiscal spending to the first quarter.
Still, the measures are expected to be insufficient, and with “fiscal policy ammunition” running out in the second half of the year the government may introduce an extra budget and the central bank will cut rates, economists including Park Chong Hoon at Standard Chartered Plc wrote in a Feb. 12 report.

Capital Outflows
While the expectation for a rate cut is rising, a possible increase in fund outflows and doubts about the effectiveness of looser monetary policy could limit the BOK’s room to maneuver. Global funds sold $1.4 billion more of Korean bonds than they bought this month through Feb. 15 amid a selloff in emerging markets.
BOK Governor Lee Ju Yeol in December saidthe relationship between economic factors, such as lower rates leading to higher consumption, isn’t as clear as it had been in the past. South Korea is also grappling with rising household debt and the growth of so-called zombie companies that pile up debt stemming from a prolonged period of low borrowing costs.

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