BoK keeps rate at record low amid growth risks

The Pak Banker - - FRONT PAGE -

The Bank of Korea (BoK) kept its key in­ter­est rate un­changed Tues­day for an eighth con­sec­u­tive month while warn­ing that risks to the econ­omy's growth path have in­creased. The de­ci­sion to keep the seven-day re­pur­chase rate at a record low 1.5 per­cent was op­posed by board mem­ber Ha Sung Keun, who called for a cut, while his five col­leagues voted with Gov­er­nor Lee Ju Yeol. With ex­ports slump­ing, volatil­ity in fi­nan­cial mar­kets ris­ing and some signs of weak­ness in do­mes­tic de­mand, the cen­tral bank ex­panded a spe­cial loan pro­gram for small com­pa­nies.

South Korea's govern­ment bond yields fell last week af­ter Ja­pan's adop­tion of a neg­a­tive in­ter­est-rate pol­icy and the Fed­eral Re­serve's sig­nal that it will de­lay rate in­creases. While th­ese events and the un­cer­tain out­look cited by the cen­tral bank sup­port the view that the BOK may ease mon­e­tary pol­icy fur­ther, Lee said Tues­day that cur­rent bor­row­ing costs are sup­port­ive of the econ­omy.

"Com­ments in the mon­e­tary pol­icy state­ment were dovish over­all, and the board has toned down its as­sess­ment of the econ­omy." said Yoon Yeo Sam, a fixed in­come an­a­lyst for Dae­woo Se­cu­ri­ties Co. "Men­tion­ing the mon­e­tary poli­cies of ma­jor coun­tries in the state­ment shows that the cen­tral bank feels pres­sure from ex­ter­nal events."

Korea's won has weak­ened 3.6 per­cent this year ver­sus the dol­lar, mak­ing it the big­gest loser among Asian cur­ren­cies. The yield on three-year govern­ment bonds fell 22 ba­sis points dur­ing the same pe­riod to a record low of 1.44 per­cent as of 12:27 p.m. Seoul time on Tues­day.

Lee said that while mon­e­tary pol­icy is hav­ing an ef­fect, the im­pact of in­ter­est-rate cuts is weaker than in the past and mon­e­tary pol­icy alone can­not solve struc­tural prob­lems. The BOK will be cau­tious about chang­ing the key rate, he said, adding that Korea wasn't at the point of need­ing to adopt un­con­ven­tional poli­cies as other coun­tries have.

"Korea also may ex­pe­ri­ence un­ex­pected side ef­fects from a rate cut, as seen in Ja­pan where adopt­ing a mi­nus rate is not work­ing as planned," Lee said.

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