Bank of Korea holds off tightening policy on jobs, inflation worries

[SEOUL] The Bank of Korea kept monetary policy unchanged as expected on Friday, and its chief hosed down expectations of further policy tightening this year, in the face of a jobs crisis and inflation still stubbornly below target.

Governor Lee Ju Yeol said growing doubts about job market recovery, already straining consumer sentiment, together with weak inflationary pressure from domestic demand meant policy makers should stay in a wait-and-see mode.

Government bond prices rallied across the board, with yields in every maturity dropping as Governor Lee's conference began at around 0220 GMT. The September contract on three-year treasury bond futures increased 0.13 points to trade at 108.80 as of 0320 GMT.

"Consumer inflation will be below projections made in July, as government is increasing welfare-related subsidies," Mr Lee told a news conference after the BOK held its policy rate at 1.50 per cent in a 6-1 vote.

Lee Il Houng was Friday's sole dissenter on the seven-member board, voting to raise rates. He voted against the majority at the BOK's July meeting. Thirteen out of 19 respondents in a Reuters poll foresaw at least one dissenter.

Kong Dong Rak, an economist at Daishin Securities, said Mr Lee's comments on inflation trailing expectations have tempered market expectations of a hike, although rising interest rates in the United States have raised concerns about capital outflows.

"Lee openly made it clear that inflation will be lower. As such, raising policy rates isn't an easy option even though a higher rates could help stabilise financial markets," Mr Kong said after Mr Lee's news press conference.

"Bonds also rallied because Lee said uncertainties are higher, which market interpreted as a prelude to a growth outlook cut" in the months ahead, Mr Kong added.

Headline inflation has stayed below the bank's target of 2 per cent since October 2017, allowing the BOK board to be patient in its approach to policy normalisation.

Mr Lee said increased government spending to support medical treatment for the elderly was one reason for the lower inflation outlook.

Statements released after the rate decision showed policymakers were concerned about South Korea's lack of job growth as well as trade frictions between the United States and China, which were raising fears of collateral damage to other export-reliant Asian economies.

The economy created only 5,000 jobs in July from a year earlier, the smallest annual gain since January 2010, while average disposable household incomes declined in annual terms over the second quarter.

South Korea has drafted a decade-high expansion in fiscal spending for next year, allocating 470.5 trillion won (S$580.19 billion), to creating jobs and shoring up growth.

Eleven out of 19 economists surveyed said one interest rate hike is likely before the end of the year, to track looming rate hikes at the US Federal Reserve in September and December.

The Bank of Korea has monetary meetings scheduled for Oct 18 and Nov 30.

REUTERS