SEOUL: The Bank of Korea (BOK) Thursday announced that it kept its key rate unchanged at 2 percent, amid lingering uncertainties with the global economy.
The rate freeze comes after the central bank cut its rate by 0.25 percentage points in both August and September. The BOK’s decision reflects an economy that is recovering slowly, with consumer sentiment remaining sluggish despite the previous rate cuts and the government’s expansionary policies. “The monetary policy should reflect growth, price, macroeconomic indexes and financial stability risks in a balanced way. We should pay attention to financial stability risks too as household debt is soaring,” BOK Governor Lee Ju-yeol said in a press briefing after the monetary policy committee’s meeting.
Concerning policy direction next year when the U.S. Federal Reserve (Fed) is expected to raise its policy rate, he said he cannot predict the future. “We cannot prejudge and will decide depending on the circumstances,” he said.
As for the weakening yen, he said that adjusting the key rate is not the right response. “We have concerns over a negative impact of the weakening yen. But the market’s recent reaction to the weakening yen has been excessive in some degrees,” he said. The committee said it will closely monitor external risk factors such as shifts in major countries’ monetary policies, as well as the trends of household debt and capital flows. The committee forecasts that the global economy will sustain its modest recovery going forward, boosted by the United States. However, it said the monetary policies of major countries ― with continued economic sluggishness in the eurozone, weakening of economic growth in some emerging market countries, and geopolitical risks ― remain uncertainties to observe closely. Analysts say that after this month’s monetary policy, a further rate cut will not be likely next month.
“Today’s rate freeze has toned down the market’s expectations for a further rate cut amid the growing concerns over the weakening yen, coupled with Japan’s stimulus spending announcement in October,” Kong Dong-rak, a researcher with Hanwha Investment and Securities, said. He said that an additional rate cut is needed to boost the economy, but there are no immediate factors which can bring the rate down. “The BOK will likely keep the rate at the current 2 percent for the time being,” he said.
However, Nomura Securities released a report that Korea’s economic growth rate is forecast for 3.4 percent, lower than the previous estimation of 3.5 percent. “The BOK will likely cut the rate in December or the first quarter of next year,” the report says.
Last month, the BOK lowered its growth forecast for the year to 3.5 percent from 3.8 percent. It also trimmed its 2015 outlook to 3.9 percent from 4 percent.
