BoK keeps rate at record low amid growth risks
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.