BoK holds key rate at record low ahead of Fed meeting

 

As expected, the Bank of Korea held its benchmark rate a record low for a six straight month on Thursday as the country’s jittery financial market waited for the U.S. Federal Reserve to decide whether to implement a much-anticipated policy tightening

 

"Looking ahead, while working to sustain the recovery of economic growth, the Board will conduct monetary policy so as to maintain price stability over a medium-term horizon and pay attention to financial stability. In this process it will closely monitor external risk factors such as any changes in the US Federal Reserve’s monetary policy or in economic conditions in emerging market countries including China, the movements of capital flows, and the trend of increase in household debt,” the central bank said in a statement after its monetary policy committee kept its base rate steady at 1.50 percent

 

"In the coming months the Korean economy is expected to gradually improve, albeit at a moderate pace, owing mainly to an improvement in consumer sentiment and to the effects of government measures." "Uncertainties do still exist, however - related for example to the divergence in monetary policies between the Fed and the ECB, and to instabilities in some emerging market economies,” the statement added.

 

The US Federal Reserve, which will hold its two-day policy meet starting December 15, is widely expected to hike rates for the first time in nearly a decade next week.

 

The Bank of Korea has said that even if the Fed raises interest rates, South Korea's stockpile of foreign reserves and its huge current account surplus will shield the economy from immediate shocks. However, policymakers have been wary of possible risks that may emerge from vulnerable economies after any Fed rate hike is implemented.

 

A state-run think tank on Wednesday revised down its economic growth forecast for next year with weak exports expected to continue hobbling expansion.

 

In its biannual report, the Korea Development Institute (KDI) said growth in Asia's fourth-largest economy is expected to rise 3.0 percent next year, slightly down from its 3.1 percent growth projection made in May.

 

This year, the KDI said the economy would grow 2.6 percent, down from its previous forecast of 3.0 percent. This was lower than forecasts made by the BOK and the finance ministry, which see this year's growth at 2.7 percent and 3.1 percent, respectively.

 

Kwon Young-sun, a senior economist at Nomura International, said in a media briefing this week that the Bank of Korea will likely cut interest rates twice in 2016 to 0.5 per cent to prop up Asia's fourth-largest economy.

 

He said that the recent government's move to tighten mortgage loan schemes will give wider room to the central bank to adopt a lower interest rate policy.

 

Kim Sang-hoon, fixed income analysts at KB Investment & Securities, said he forecast the Bok will cut the key rate in March.

 

"I expect the U.S. Fed to raise rates slowly for its own exports as well as for developing nations. If the Fed raise is slow, there will be less pressure for the BOK to move in the opposite direction,” he said.