Bank of Korea holds rate steady to gauge budget impact, Brexit

The logo of the Bank of Korea is seen on the top of its building in Seoul, South Korea, on March 8.
The logo of the Bank of Korea is seen on the top of its building in Seoul, South Korea, on March 8. PHOTO: REUTERS

SEOUL (BLOOMBERG) - South Korea's central bank held its benchmark interest rate steady on Thursday (July 14) as it assesses the impact of the government's fiscal stimulus and the UK's vote to leave the European Union.

The seven-day repurchase rate was left unchanged at a record low 1.25 per cent, as forecast by all 20 economists in a Bloomberg survey. The central bank will release updated projections for economic growth and inflation later on Thursday, having forecast 2.8 per cent and 1.2 per cent, respectively, in April. Governor Lee Ju Yeol will hold two press briefings, one on the monetary policy decision, and another on the inflation target.

Mr Lee said after a surprise rate cut in June that risks to the economy have increased amid restructuring of indebted companies and a slowdown in global trade, suggesting a downward revision to growth. South Korea's sovereign bond yields fell to record lows this month as concerns that the Brexit vote will hurt global trade dimmed the Asian economy's outlook.

"The economic and financial impacts expected from Brexit are unclear at the moment, and the BOK also will want to check the details of the government's extra budget plan," said Lee Surbee, a fixed-income analyst for Samsung Securities Co. "I expect a cut to 1 per cent later this quarter."

The Korean government announced a 10 trillion won (S$11.77 billion) supplementary budget last month, mainly to create jobs and aid regional economies that will be hurt by corporate restructuring. Data released on Wednesday showed the jobless rate in South Gyeongsang province, where shipbuilders and shipping companies are located, rose the most among the country's regions, and the pace of job creation in manufacturing slowed considerably.

Recent economic data have shown signs of slight improvement, although it remains in doubt whether the trend will continue. Exports fell 2.7 per cent in June from the previous year, the smallest drop in a year, and industrial output for May expanded more than expected. Yet the finance ministry said in a monthly economic assessment report that the slowdown in job creation and a delay in sentiment improvement will limit the economic recovery.

Consumer prices rose 0.8 per cent in June from a year earlier, trailing the 2 percent inflation target for six months since the new goal was applied. Mr Lee will hold a separate briefing in the afternoon to explain why consumer prices have remained low, and lay out policy measures to achieve the target.