Bank of Korea holds rates for 10th straight month

South Korea's central bank kept interest rates untouched on Tuesday for a 10th straight month, and its governor stressed that the current rate level supports economic growth, although a lowered growth forecast for this year kept expectations of a rate cut alive. The Bank of Korea (BOK) committee held its base rate steady at 1.50 percent, as expected, while observing the fallout from a parliamentary election earlier this month and policy changes in other countries.
Governor Lee Ju-yeol said later the bank had lowered its growth forecast for this year to 2.8 percent from 3.0 percent. The inflation forecast for 2016 was also downgraded to 1.2 percent from 1.4 percent. "First quarter growth was weaker than we expected. Global growth that dragged down trade in addition to low oil prices also contributed to the lower forecast," Lee told a news press conference.
"However, our stance is that the economy will show steady improvement after the second quarter." Lee stressed throughout the news conference that current interest rates supported the economy, but he noted there was a limit to the degree which interest rate measures could work, a point he also stressed at last week's G20 meeting of finance ministers and central bank governors in the United States. "The troubles we face are more from structural than economic factors and it is the BOK board's firm stance that fiscal and monetary policy should work together (to overcome them)," he said.
Lee may have painted a sunnier view of the economy going forward, but analysts said the ongoing recovery was still too fragile and needed more help, preferably from monetary policy. "The BOK is weighing when to cut rates. I think it will (cut) when global markets settle down more and when the bank can confirm it will have policy cooperation (from the government)," said Peter Park, economist at NH Investment & Securities. "It's just a matter of time. I still feel there is a high chance we will see a cut in the second quarter."
A steady majority of analysts has largely seen the BOK as likely to cut rates in the near-term to lend the torpid economy a further boost before additional rate hikes in the US make it more difficult for the South Korean central bank to act. Exports, the country's traditional engine of growth, have been falling since last year while the recovery in domestic consumption has softened after surging late last year.