Bank of Korea holds policy rate steady with inflation below goal

[SEOUL] South Korea's central bank left its key interest rate unchanged on Thursday as inflation remains below target and the nation's currency trades near a multi-year high.

The decision to keep the seven-day repurchase rate at 1.5 per cent, in the next-to-last rate decision before governor Lee Ju-yeol's term ends in March, was forecast by all 17 analysts surveyed by Bloomberg. The economy is likely to grow at the 3 per cent level this year, with inflation in the upper 1 per cent range, the Bank of Korea (BOK) said in a statement.

With exports growing, South Korea's economy looks to be on a solid footing, but any policy changes are expected to be gradual after the increase in borrowing costs at the last meeting in November. The central bank is mindful of muted inflationary pressure, and higher rates can bring further appreciation in the won.

"The recent softening in inflation and strengthening of the won reduce the need for the BOK to hike rates consecutively," Lim Puo Hua, an economist at Continuum Economics, said before the decision. Higher rates would reduce export competitiveness by driving the currency higher, she said.

A majority of analysts surveyed by Bloomberg on longer-term rate projections forecast the next increase to come in the second quarter or later. Only five of 25 expected it to take place in the first quarter.

Any increased hawkishness in Mr Lee's comments, such as highlighting risks from record household debt or expressing greater optimism on the economy, could bolster the views of the few analysts who expect an increase to come next month.

With the BOK staying pat on Thursday, the US benchmark rate could soon surpass South Korea's if the Federal Reserve raises rates in March as expected. Yet, Bank of America Merrill Lynch sees the rate differential - which may widen to 50 basis points in the first half of the year, according to the bank's estimates - as unlikely to cause capital outflows. South Korea has substantial foreign-exchange reserves and a large current-account surplus, BofAML economists including Sylvia Sheng wrote in a report.

President Moon Jae-in has given no hints about who he will choose to succeed Lee. Mr Moon's choice will face hearings in Parliament, although lawmakers don't have the power to block the appointment if the president presses ahead.

The South Korean won closed at 1,069.25 per US dollar on Wednesday after reaching more than a three-year high earlier this month. The yield on three-year government bonds rose 10 basis points this month to 2.23 per cent.

BLOOMBERG