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UPDATE 2-S.Korea c.bank keeps rates at record low, slashes 2017 GDP forecast
January 13, 2017 / 1:27 AM / 8 months ago

UPDATE 2-S.Korea c.bank keeps rates at record low, slashes 2017 GDP forecast

* BOK keeps rates at 1.25 pct (Reuters poll 1.25 pct)

* 2017 GDP growth cut to 2.5 pct vs 2.8 pct

* Consumption biggest reason for GDP downgrade -BOK chief

* Central bank observing events amid uncertainty

* Political scandal, Trump qualms keep BOK on hold (Updates with governor’s news conference)

By Christine Kim and Cynthia Kim

SEOUL, Jan 13 (Reuters) - South Korea’s central bank kept interest rates unchanged at a record low 1.25 percent on Friday, for a seventh month, and slashed its growth forecast for 2017 as it braces for U.S. policy developments under the presidency of Donald Trump.

The central bank is also watching an influence-peddling scandal that could topple President Park Geun-hye, who has already been impeached by parliament and now awaits a constitutional ruling.

“Going forward, we should scrutinise the new U.S. administration and growing household debt,” Governor Lee Ju-yeol told a news conference, noting Friday’s vote had been unanimous.

The central bank last adjusted rates in June last year, cutting by 25 basis points.

Lee said 2017 GDP growth was now seen at 2.5 percent and the consumer price index was seen rising 1.8 percent versus previous forecast growth of 2.8 percent and 1.9 percent, respectively.

“Much has changed since our last revision in October, leading to our forecasts today,” said Lee. “But the biggest reason for the downgrade was consumption.”

The finance ministry cut its economic growth forecast this year to 2.6 percent from 3.0 percent seen in December.

Lee said recent improvements in consumption were partly government-led, and noted his disagreement with the view consumer spending was recovering swiftly.

Consumer sentiment fell in December to its worst level in more than 7-1/2 years, sapped by Korea’s political crisis and turbulent financial markets.

“Judging from today’s remarks, the BOK will stay accommodative for a while although I doubt it will increase the chances for a rate cut,” said Oh Suk-tae, economist at Societe Generale.

“It seemed like Lee was giving forward guidance; the BOK won’t be raising rates just because the United States is doing so.”

Even if some analysts feel a cut is needed, the BOK finds itself in a tight spot for monetary policy: Although economic growth is sluggish, household debt continues to mount even as the U.S. Federal Reserve readies further rate hikes.

Benchmark 10-year Treasury bonds bounced from record-low yields last December as the Fed hiked rates, and have been trading at levels last seen in late 2015, raising questions over gaps between South Korea’s policy rate and market interest rates.

This is largely the reason a majority of analysts see the BOK standing pat for the rest of the year, according to a Reuters survey, despite some saying the economy would benefit from another rate cut.

South Korea’s economy, Asia’s fourth-largest, could face headwinds from the incoming Trump administration if the protectionist policies Trump promoted in his election campaign were to be implemented - severely undermining the exports that have just started to turn around.

As for the ongoing political turmoil at home, central bank officials have said monetary policy will not be directly influenced by a new president, should one take office, but the bank is preparing itself for changed macro-economic policies that could come with a new administration.

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

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