Bank of Korea holds rates in Sept ahead of Fed, as expected

[SEOUL] South Korea's central bank kept its policy interest rate steady on Friday, a widely expected decision as it assesses the effects of its two rate cuts this year, as well as the US Federal Reserve's decision on raising rates.

The Bank of Korea's monetary policy committee left its base rate unchanged at 1.50 per cent, a media official said without elaborating. Governor Lee Ju-yeol is due to hold a news conference from 11:20 am (0220 GMT).

Markets remained unfazed as investors await the Fed's two-day policy meeting next week where it may raise interest rates, which could limit the Bank of Korea's (BOK) options. "An additional rate cut won't be easy within this year. But since the economy is not expected to improve next year and the year after that, there is always a possibility for a cut," said Park Hyung-min, a fixed-income strategist at Shinhan Investment Corporation. "If the US raises rates this year, the BOK is unlikely to reduce its base rate in fear of capital outflows. They're likely to act conservatively, and decide to keep the rates unchanged." Thirty out of the 31 analysts surveyed by Reuters had forecast no rate change on Friday. A majority of those surveyed saw the Bank of Korea standing pat for the time being, whereas a third predicted another rate cut this year.

The Bank of Korea has trimmed the policy rate twice in 25-basis-point moves this year to keep the economic recovery momentum going, something that has proven difficult as weak global demand drains energy from the export-reliant economy.

A slowdown in China, South Korea's biggest trade partner, has also troubled policymakers as China takes in about a quarter of South Korea's exports.

Recent data have shown signs of some improvement in domestic demand as the economy moves out of the shadow of an outbreak of Middle East Respiratory Syndrome which depleted consumption in May through June, but the government has said the recovery's pace is still weak.

Those who see forecast another rate cut have said more accommodation is necessary to boost growth, while others have voiced concerns over burgeoning household debt, which may hold back the country's growth in the long-term as this restrains spending power.

REUTERS