SEOUL: South Korea’s central bank on Thursday froze interest rates at a record low as expected, keeping a wait-and-see stance for seven straight months.
Bank of Korea (BOK) Governor Lee Ju-Yeol and six other policy board members decided to keep the benchmark 7-day repurchase rate on hold at 1.5 percent. The bank lowered it by 25 basis points in March and June last year each to the all-time low.
The rate freeze was widely expected on mixed signals of economic conditions at home and abroad. According to a Korea Financial Investment Association (KFIA) survey of 101 fixed-income analysts, 98 percent predicted the rate on hold.
South Korea’s domestic economic conditions improved as the record-low policy rate and the government’s efforts to reinvigorate the economy had a positive effect.
Auto sales in the domestic market surged 17.7 percent in December from a year earlier, with sales in gasoline and diesel rising 2.4 percent. Credit card usage increased 8.5 percent in the same month.
Sales in department stores and discount chains, however, reduced 3.8 percent and 2.1 percent each last month as winter clothing sales soured in December amid higher temperature compared with a year earlier.
Exports, which account for about half of the economy, tumbled 13.8 percent in December from a year ago due to economic slump in emerging economies, especially in China.
South Korea’s exports maintained a downward trend for 12 months in a row. China is South Korea’s largest trade partner.
Amid the sluggish exports, production in the mining and manufacturing industries shed 2.1 percent in November from a month earlier, but output among service firms kept an upward momentum for five months to November.
The finance ministry said in its monthly economic report”Green Book”that downward risks to the economy grew on the back of economic instability in China, interest rate hike in the United States, lower global oil prices and the nuclear test by the Democratic People’s Republic of Korea (DPRK).
The BOK also said in its report on direction of this year’s monetary policy that it will maintain an accommodative policy stance, indicating its focus on downward risks.
The bank, however, seemed hard to cut rates further as the U.S. rate hike may trigger an abrupt exodus of foreign capital from the South Korean financial market. The country’s household debts kept a record-breaking trend amid the record-low interest rate, preventing the bank from lowering policy rate further.
Expectations for the BOK’s further rate cuts remained as the end of the government’s stimulus efforts, such as the consumption tax cuts, is feared to cause so-called”consumption cliff,”or an abrupt drop on consumption coming from the stimulus effect.
Cheaper oil is expected to have a negative impact on South Korea’s exports, which rely much on oil and chemical products. Dubai crude, South Korea’s benchmark, recently fell below 30 U.S. dollars per barrel.
