January 14, 2016 – South Korea’s central bank kept interest rates unchanged for a seventh straight month today, in line with expectations, as it observes the recent market turmoil sparked by China as well as the effects of the US December rate hike.
The Bank of Korea’s (BOK) monetary policy committee held its base rate steady at 1.50 per cent in an unanimous decision, Governor Lee Ju-yeol told a news conference.
Of 30 analysts surveyed in a Reuters poll before the decision, 29 projected the BOK would leave the base rate unchanged on Thursday while a majority of those polled saw the central bank leaving rates unchanged for a prolonged period of time.
“Although the US Federal Reserve hiked rates last month, there is little incentive for the BOK to follow suit,” Krystal Tan, Asia economist at Capital Economics, said in a note. “Given its strong fundamentals, such as a significant current account surplus and ample foreign exchange reserves, Korea should prove resilient to any volatility stemming from US monetary tightening.”
Analysts mostly expect the central bank to stand pat on rates in the coming months amid benign price pressures, a fragile economy and a weakening won.
“Even though the BOK cut interest rates four times (since 2014), household debt has been increasing continuously, which means there wasn’t much impact from interest rate decisions,” Kim Min-gyu, fixed income strategist at Kiwoom Securities, said. “It is not practically useful to cut interest rate.”
For Yuanta Securities’ Lee Jae-hyung, any additional rate cuts will likely come only around the second half of the year.
“The biggest factors were China and oil prices. China is closely related to South Korea’s domestic market, and the oil price impacts inflation, thus affects shipbuilding and shipping industries,” the fixed income analyst said. “I think the strong global dollar and weak renminbi had a bigger effect in weakening pressure to cut rates.”
Earlier this morning, South Korea’s benchmark Kospi index slumped 1.3 per cent to 1,891.65 points, in line with the regional sell-off.
The South Korean won fell against the dollar, down 0.6 per cent from the previous close of 1,204.0, as market participants preferred less risky assets and remained jittery on China’s yuan.