SEOUL: The Bank of Korea kept its base rate unchanged for a sixth straight month as expected, sticking to its cautious wait-and-see stance as it assesses the impact on the economy of the latest U.S. rate increase and political uncertainty stemming from the impeachment of President Park Geun-hye.
The bank’s decision came just hours after the Federal Reserve raised a key U.S. interest rate for the first time in a year and signaled a more hawkish stance on expected policy tightening next year. The Bank of Korea remains hesitant to lower rates due to concerns over household debt growing rapidly on cheaper borrowing costs and the risk of sudden capital flight should the Fed rate increases come faster than expected over the coming year.
All 15 market analysts polled by The Wall Street Journal ahead of the decision had expected the bank to hold the policy rate steady at a record-low 1.25% at its December meeting. The bank last cut the rate in June. Still, most analysts say Korea’s anemic economy needs additional fiscal and monetary stimulus, even though some of them have recently pushed back or scaled down their expectations for policy easing amid growing political uncertainty at home and abroad.
Korea’s exports—accounting for half the country’s growth—are still wobbly amid sluggish global demand, despite a rebound in November for the first time in three months. Inflation remains subdued with consumer prices rising 1.3% in November—below the central bank’s annual target of 2%. Private spending and business investment remain frail in Korea.
The Korea Development Institute, a state-run think tank, said in a twice-a-year outlook last week it expects the country to grow 2.4% in 2017—slower than its previous estimate of 2.7% growth—as sluggish exports and weak domestic demand drag on the economy. The downward revision prompted the institute to call on the central bank to continue its accommodative policy and cut its base rate further, if needed, to help counter headwinds from weak global trade, growing international protectionism and other risks to growth.
