South Korea holds rate at record low amid rising debt, capital outflow

A worker cleans a building of the Bank of Korea in Seoul in this March 12, 2009 file photo.
A worker cleans a building of the Bank of Korea in Seoul in this March 12, 2009 file photo. PHOTO: REUTERS

SEOUL (BLOOMBERG) - The Bank of Korea held the benchmark interest rate unchanged for a ninth month on Thursday (March 10) )amid concern that another cut could aggravate risks from rising debt levels and capital outflows.

The decision to keep the seven-day repurchase rate at a record low 1.5 per cent was forecast by 11 of 18 economists in a Bloomberg survey. The remaining seven expected a 25 basis point cut. DBS, HSBC and Goldman Sachs were among those who forecast no change Thursday but expect a move next quarter.

While South Korea also faces risks to growth from falling exports and weakening domestic demand, the bar to further easing is higher for Governor Lee Ju Yeol and the majority of the policy board owing to record-high household debt and the uncertain global outlook.

"The increase in capital outflows and heightened volatility in the won would dissuade the BOK," Ma Tieying, an economist for DBS, said before the decision. "We expect the BOK to take action in the second quarter, cutting the benchmark rate by 25 basis points to 1.25 per cent."

Some board members said at the Feb. 16 policy meeting that the bank should save policy room to prepare for heightened economic uncertainty. The sole dissenter, Ha Sung Keun, said then that falling exports would hurt production, income, and consumption.

The central bank's most recent forecastsare for 3 per cent growth and 1.4 per cent inflation for 2016. It releases new projections next month.

Thursday's meeting was the second-to-last gathering for a rate decision before four of seven board members leave on April 20, as their terms end. Among those who will leave are Moon Woo Sik, known to be the most hawkish, and Ha, the most dovish.

Foreign investors withdrew US$152 million from Korean bonds and US$1.4 billion from stocks this year as of March 9 amid uncertainty in emerging markets and rising tensions with North Korea.

The finance ministry and central bank intervened verbally to steer investors on Feb 19 and were suspected of having sold dollars in the market as the won traded at the weakest level in more than five years amid capital outflows and rate-cut bets.

The won has weakened 3.6 per cent against the US dollar this year, making it one of the worst performers among regional peers. The yield on three-year government bonds fell 19 basis points this year to 1.48 per cent when local markets closed on Wednesday.