South Korea holds rates amid growth risks, trade tensions

[SEOUL] South Korea's central bank kept monetary policy steady on Thursday for a seventh straight meeting, as it assessed new signs of softness in the economy and the potential fallout from global trade frictions.

The Bank of Korea decided to keep its benchmark seven-day repurchase rate at 1.50 per cent, as expected by 14 of 21 economists in a Reuters poll.

After the BOK decision, the won fell 0.43 per cent against the US dollar while the Kospi fell 0.16 per cent. December futures on three-year treasury bonds gained 0.05 points to 108.52.

Stalling export growth and persistent concerns about the jobs market dampened earlier market expectations for a possible interest rate increase this month.

Still, the majority of economists surveyed by Reuters expect a quarter-point increase to 1.75 per cent at the bank's next meeting in November.

BOK Governor Lee Ju-yeol has previously acknowledged that the bank needs to address mounting financial imbalances from years of emergency stimulus released between 2012 to 2017.

"The growing policy interest rate differential and household debt, as well as soaring Seoul home prices are risks to financial stability. The bank will need to raise interest rate within this year to address these," Yoon Yeo-sam, an analyst at Meritz Securities said before the rate decision.

Kong Dong-rak, an economist at Daishin Securities, said the chances of a rate hike in November are higher now, adding he expects Governor Lee to give a clear hiking signal to the public during the press conference later on Thursday.

"The bank will surely downgrade growth forecasts today. As higher interest rate could dampen recovery sentiment, the BOK held rates steady this time to avoid giving mixed signals," Kong said after BOK held rates steady on Thursday.

Governor Lee on Oct 4 warned the bank's 2018 economic growth outlook could be downgraded from the current 2.9 per cent forecast and flagged concerns about rising household debt and the need to adjust policies accordingly.

The accelerating tit-for-tat trade war between Beijing and Washington also leaves South Korea's export sector vulnerable with shipments declining 8.2 per cent in September from a year earlier, the biggest drop in over two years.

South Korea's labour market recovered modestly from a month earlier with the unemployment rate falling to 4.0 per cent in September from 4.2 per cent in seasonally adjusted terms, but the government report showed manufacturers and retailers still shedding jobs following increases in minimum wages.

While headline inflation is still below the bank's target of 2.0 per cent, an acceleration in September consumer inflation to 1.9 per cent in annual terms should give policymakers some confidence to deliver a hike this year, says Kang Seung-won, an analyst at NH Securities.

"The economy can still grow at its potential growth rate, and as the BOK's inflation outlook for next year is at 1.9 per cent, a hike looks appropriate," Mr Kang said before the rate decision.

Mr Lee will provide updated full-year forecasts for growth and inflation at a news conference scheduled for 11:20am Seoul time (0220 GMT).

REUTERS