South Korea’s central bank held its key interest rate steady yesterday, as expected, as it evaluates risks and stays cautious ahead of any further monetary tightening in the United States.
The monetary policy committee kept the base rate at record-low of 1.25%, a Bank of Korea (BoK) media official announced without elaborating.
Governor Lee Ju-yeol is due to hold a news conference from 11:20 am Seoul time (0220 GMT).
All 20 analysts polled by Reuters had predicted the BoK would stand pat yesterday, with a small majority seeing a rate hike in the first half of next year.
The central bank faces a tricky balancing act in the months ahead as it weighs whether to follow the rate-hike path of its US counterpart, or focus more on boosting economic growth at home, thus maintaining loose monetary policy.
With yesterday’s decision, the key rate has been on hold for 16 straight months, the longest in which monetary policy remained unchanged.
“The Fed’s plans to tighten monetary policy further probably was a factor yesterday,” Paik Yoon-min, fixed income analyst, Kyobo Investment Trust said after the BoK decision.
“There is no urgency for the BoK to hike rates, as there wouldn’t be sharp capital outflows (from South Korea) even if the Fed indeed raises rates again in December,” Paik said.
South Korean won and bond futures largely ignored the BoK decision, remaining muted.
The Federal Reserve has raised rates twice this year, and another rise in December is widely expected.
BoK policymakers worry that continued hikes in Fed rates may lead to capital outflows from Asia’s fourth-largest economy by narrowing the yield gap, at a time when South Korea’s bond markets recently saw net outflows from foreign investors due to risks surrounding North Korea.
Foreign investors in September offloaded a net 3.7tn won ($3.27bn) worth of South Korean bonds as tensions between Pyongyang and Washington spiked following a series of missile and nuclear provocations by North Korea.
South Korea’s economy grew 2.7% in the second quarter on an annual basis after a 2.9% expansion in the preceding quarter.
The central bank forecasts growth of 2.8% for all of 2017.
The BoK recently signalled it could tighten policy rates should growth, supported by robust exports, remain strong.
The bank is due to release new economic estimates at 1:30pm (0430 GMT).
Whether the bank raises its growth outlook could provide further clues on its next moves, said Kim Ji-man, a fixed-income analyst at HMC Investment & Securities.
Minutes from the August meeting showed three board members felt a hike might be necessary soon.
If the BoK raises its growth outlook, that “could mean there could soon be a dissenting vote, and that the board may be turning hawkish,” Kim said.
The Monetary Policy Board’s decision to hold rates in August was unanimous.
A South Korea won note is seen in this illustration. The monetary policy committee kept the base rate at record-low of 1.25%.
