South Korean policymakers hint rates may stay put for awhile

Published Thu, Feb 5, 2015 · 09:41 AM

[SEOUL] South Korean policymakers have been heartened by improving domestic economic data, officials say, suggesting the Bank of Korea may delay a widely-anticipated rate cut despite the flurry of easing moves by global central banks.

Both the finance minister and central bank chief have taken more optimistic tones in recent weeks, in contrast to the gloomy talk that pervaded the final months of 2014.

Recent easing moves in Europe, Australia and elsewhere have helped flatten South Korea's bond yield curve but a senior Bank of Korea (BOK) official played down any direct impact on policy direction.

"The situation got better in November from October and even further in December, and given this trend, it's fair to say the interest rate level is now appropriate," said the official, who declined to be named.

Finance Minister Choi Kyung-hwan, whose stern warnings of Japan-style deflation risk last July were followed by stimulus measures and two rate cuts, changed tack on Dec 31, noting positive signs for Asia's fourth-largest economy.

In December, industrial production growth hit a more-than five-year high, retail sales were strong and the inventory-to-shipments ratio fell to a 16-month low.

On Thursday, he reaffirmed his 2105 economic growth target of 3.8 per cent, above market and central bank views, and dismissed deflation warnings as misguided.

A senior finance ministry official also said he does not think the minister changed his tone intentionally but was simply referring to data flows, which clearly show an improving trend.

The BOK last cut rates in October, to record-matching low of 2.0 per cent. It next reviews policy on Feb 17. The majority of analysts in a Jan 13 Reuters poll forecast a rate cut by June.

The central bank is concerned about fast growth in a household debt-to-income ratio that's among the highest in the world and is regarded as a top risk.

Societe Generale economist Oh Suk-tae said he was losing confidence in his prediction for an April rate cut because household debt, a major policy factor in South Korea, has been growing fast in recent months.

"The government's opinion is still important for the central bank policy and recent remarks and statements from the finance ministry indicate that the government was not counting on another rate cut soon," Mr Oh said.

Nomura economist Young Sun Kwon still predicts the BOK will eventually have to cut interest rates, saying the central bank's growth views will prove overly optimistic.



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