South Korea’s central bank stands pat on rate amid global slowdown

01, Jun. 2019

SEOUL, NNA – South Korea’s central bank on Friday left the key interest rate unchanged for the fourth straight meeting, as largely expected, maintaining the neutral policy stance amid signs that weaker global demand is slowing export-led economic growth.

In a 6-to-1 vote, the Bank of Korea’s seven-member policy board decided to keep the benchmark rate, instead of lowering it, as household debt remains high in South Korea.

Key points:

―― The BOK left its Base Rate steady at 1.75 percent. The last policy change was in November, when the bank raised the rate by a quarter percentage point to keep the U.S.-Korean interest rate differential from widening and curb the curb the growing pace of household debt.

―― Board member Cho Dong-chul dissented, calling for a 25-basis-point rate cut. Earlier this month, he told reporters that the bank should worry about the “extremely low inflation, which has been far below the target level for a while,” according to news reports. Before joining the board in 2016, Cho was a researcher at the Korea Development Institute, a publicly funded think-tank.

―― The domestic economy has recovered slightly from its slowdown in the January-March quarter, although capital investment and construction are slow to recover and exports are sluggish, the bank said.

―― “Looking ahead, the board will conduct monetary policy so as to ensure that the recovery of economic growth continues and consumer price inflation can be stabilized at the target level [of 2 percent] over a medium-term horizon, while paying attention to financial stability,” it said.

Takeaway:

―― The credit tightening cycle has ended in South Korea and the central bank appears to be headed for easing later this year. Market participants will look for signals for easing in the coming months as they expect the bank to use dissenting voices to suggest a change in monetary policy ahead.

―― The bank last cut the benchmark lending rate by 25 basis points from 1.50 percent to 1.25 percent in June 2016. The bank has since raised the rate twice, in November 2017 and November 2018.