Bank of Korea holds rate at record low

The Bank of Korea held its key interest rate unchanged at a record low as it gauges the health of the economy and the impact of China's currency devaluation. Authorities in Seoul are closely monitoring volatility in financial markets following the drop in the yuan, which the central bank said Thursday adds to uncertainties for Korea.

"It's clear that the BOK acknowledges China's move as a risk to its growth path," said Lee Sang Jae, a Seoul-based economist for Eugene Investment & Securities Co. "The chance of a rate cut is now higher with the yuan devaluation."

Low borrowing costs have failed to boost economic expansion in Korea, with gross domestic product increasing just 0.3 percent in the second quarter and exports falling every month this year. Debt is increasing faster than incomes, with bank lending to households surpassing 600 trillion won ($510 billion) last month.

The central bank's decision to hold the seven-day repurchase rate at 1.5 percent on Thursday was unanimous, and matched the forecast of all 16 analysts surveyed by Bloomberg. It follows four cuts in the past year that total a full percentage point.

Korea's won strengthened 1.4 percent versus the dollar to 1,174.40 at 12:55 p.m. in Seoul. It's weakened 5 percent against the dollar since the end of June, 3.6 percent against the Japanese yen and 1.9 percent versus the yuan during the same period.

"While the exchange rate should be decided on supply and demand in the market and economic fundamentals, an excessive move in one direction isn't desirable," said BOK Governor Lee Ju Yeol. "We have prepared scenarios and measures for global financial market volatility and its impact on the domestic economy." Lee didn't elaborate on these.