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Cautious BOK keeps interest rates steady as uncertainty dominates
February 23, 2017 / 7:16 AM / 7 months ago

Cautious BOK keeps interest rates steady as uncertainty dominates

The buliding of Bank of Korea is seen in Seoul, South Korea, July 14, 2016. REUTERS/Kim Hong-Ji/Files

SEOUL (Reuters) - South Korea’s central bank opted for stability on Thursday, keeping its interest rates unchanged for an eighth straight month as it faces declining consumer confidence, trade challenges, and a government in turmoil from a political scandal.

The Bank of Korea left its base rate at 1.25 percent, a record-low, with Governor Lee Ju-yeol noting the board’s views on the economy had not changed since January when it last convened.

“There is no change to our previous stance that policy will be kept accommodative,” Lee said.

South Korea has worried that its exports are at risk from U.S. President Donald Trump’s threatened trade tariffs, especially if the United States declares South Korea a “currency manipulator”.

“I don’t see a large possibility of Korea being named a currency manipulator,” Lee told a news conference.

“The (official stance of the BOK) is that the FX rate should be determined by the market. Authorities only smooth when volatility is extreme from herd behaviors.”

Yoon Yeo-sam, fixed-income analyst at Mirae Asset Daewoo Securities, shared the governor’s view that the likelihood of the United States branding Seoul a currency manipulator was remote.

“There is little grounds to do that,” Yoon said. “There will be damage to the U.S. if it names South Korea a currency manipulator, so it seems reasonable to think that Korea won’t get that label.”

Lee maintained a neutral stance throughout his post-decision news conference, stressing exports were not yet out of the woods but were expected to do better this year than forecast.

Inflation, despite a recent acceleration, would also linger close to the bank’s 2-percent inflation target, he said.

A majority of analysts forecast the bank will stay its hand through year-end, although the Bank of Korea has been eyeing steadily snowballing household debt. Data earlier this week showed the debt soared last quarter at its fastest annual pace in more than a decade.

Lee also noted that FX swap rates, used in transactions aimed at avoiding currency risk, were falling because of a narrowing interest rate differential between overseas countries and South Korea’s domestic market.

“Chances of FX swap rates falling further from current level aren’t that big.”

A BOK statement noted that the BOK board would closely monitor domestic and external threats from the U.S. Federal Reserve’s normalization of monetary policy.

“The BOK is likely training its focus outside the country, as policy in the United States is still fluid while there are upcoming elections in Europe,” said Kim Jin-a, a fixed-income analyst at ILK Securities.

“At this point it looks like the BOK will keep rates unchanged all year.”

The South Korean central bank is also waiting for the Constitutional Court to decide in coming weeks whether it will uphold parliament’s vote to impeach President Park Geun-hye over an influence-peddling scandal.

Park is accused of acting with her long-time friend, Choir Soon, to pressure big businesses including Samsung Group to donate to two foundations set up to back the president’s policy initiatives.

Jay Y. Lee, scion of Samsung Group, has been kept behind bars since he was arrested on Feb. 17 for his alleged role in the corruption scandal.

Park is also accused of allowing Choir to exert inappropriate influence over state affairs. Both women have denied wrongdoing.

If Park is impeached, a presidential election will be automatically triggered within 60 days. This could mean many policy changes, including economic measures, and the central bank is unlikely to change policy amid such uncertainty.

Concerns over trade protectionism expanding under U.S. President Donald Trump are a factor for the BOK to observe closely, given South Korean exports have begun to recover.

Reporting by Christine Kim and Cynthia Kim; Additional reporting by Dahee Kim; Editing by Eric Meijer

Our Standards:The Thomson Reuters Trust Principles.
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