Bank of Korea stands pat on key rate as downside risks increase

[SEOUL] South Korea's central bank left its key interest rate unchanged amid tepid inflation, weakening exports and deepening concern over the growth outlook for Asia's fourth-largest economy.

The Bank of Korea (BOK) kept the seven-day repurchase rate at 1.75 per cent on Thursday, as expected by all but one of 22 economists surveyed by Bloomberg. The rate was raised from a record-low 1.25 per cent in 25 basis point increments in 2017 and 2018.

While Governor Lee Ju-yeol conceded earlier this month that domestic economic growth had moderated and downside risks had increased, he held to the view that the time hadn't come to lower borrowing costs. Most economists see no change in the benchmark all year, although the bond market has flirted with the possibility of a change.

"Any changes in the governor's policy stance will come only if two conditions are met," Shin Dong-su, a fixed-income analyst at Eugene Investment Securities, said in a recent report. "One is a sharp downward revision of the central bank's economic growth forecast, and the other is the removal of concerns over the financial imbalances, but both these things seem unlikely."

Mr Lee lowered the BOK's 2019 growth and inflation projections at the January meeting to 2.6 per cent and 1.4 per cent, respectively. There is some chance they could be trimmed again later this morning.

"Policy makers have repeatedly emphasised that it is not the time to consider a rate cut. Barring a severe downturn, we think they will stick to that line and keep the policy rate steady through at least year-end," said Bloomberg's Asia Economist Team.

Persistently low inflation has also caused concern. Consumer prices rose 0.4 per cent in March from a year earlier, the slowest pace since July 2016, and far below the BOK's two per cent target.

Still, some help for the economy is on the way, with the government planning an extra budget for this year of up to 7 trillion won (S$8.34 billion).

BLOOMBERG