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South Korea's central bank keeps rates on hold as trade pressure builds

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The Bank of Korea is under pressure to join regional counterparts from New Zealand to India in easing policy to tackle growing headwinds, but has so far held back due to concerns about a potential rout in the won, Asia's worst performing currency this year, and capital flight risks.

[SEOUL] South Korea's central bank kept monetary policy unchanged for a fourth straight meeting on Friday as policymakers brace for a longer, costlier US-China trade conflict amid a slump in exports and muted inflation.

The Bank of Korea is under pressure to join regional counterparts from New Zealand to India in easing policy to tackle growing headwinds, but has so far held back due to concerns about a potential rout in the won, Asia's worst performing currency this year, and capital flight risks.

The BOK's Monetary Policy Board voted to hold the benchmark interest rate at 1.75 per cent, as expected by 20 of 21 economists forecast in a Reuters poll.

Fifteen of 21 respondents see a rate cut coming between now and 2020, while three forecast the bank to stand pat through 2020.

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Asia's fourth-largest economy has already taken a hit from a slowdown in China and the Sino-US trade war, with first quarter growth contracting at its fastest pace since the global financial crisis.

Analysts say growth would show further signs of weakening in coming weeks, as an intensifying tariff dispute between South Korea's two largest trading partners hits demand for the economy's exports.

Markets largely shrugged off the decision, looking ahead to Governor Lee Ju Yeol's press conference at 0220 GMT where names of any dissenters to Friday's decision may be announced.

Government bonds have rallied for weeks as a worsening economic outlook and stalling exports boosted rate cut bets, suggesting the tightening cycle is over.

The yields on both the three-year and 10-year government bonds hit fresh 2019 lows in May, while the Korean won has lost about 7 per cent against the dollar so far this year.

A rate cut would be the first in almost three years for the BOK. The last policy change was in November, when it raised rates by 25 basis points.

The domestic case for a cut has also been bolstered by inflation trailing the BOK's target of 2 per cent. The consumer price index rose 0.6 per cent in April from a year earlier.

Some economists speculate board members Cho Dong Chul and Koh Seung Beom were possible dissenters in Friday's decision, based on their previous dovish comments and background of working in the government agencies.

Analysts say the central bank typically uses dissenting votes to signal to markets a change in policy in months ahead.

"Doves including Cho and Koh could be dissenters. Even if we don't see any dissenters, the BOK will cut interest rate in July (to support growth)," said Kim Ji Man, an economist at Hyundai Motor Securities said before the rate decision.

REUTERS