SOUTH KOREAN ECONOMY

Bank of Korea keeps interest rate unchanged at 2.5pc

Rate increase seen coming next quarter after 13 consecutive months of no action

PUBLISHED : Thursday, 12 June, 2014, 2:56pm
UPDATED : Friday, 13 June, 2014, 2:38am

South Korea's central bank held interest rates steady for a 13th consecutive month yesterday as markets brace for an increase as soon as next quarter, but softening domestic demand and a spike in the won could still affect future policy prospects.

The Bank of Korea's monetary policy committee held its base rate at 2.5 per cent.

Although the consensus among 30 analysts for the central bank's next policy move is a rise in interest rates, analysts are split over whether the first increase will occur this year or next.

Some analysts have pushed back the timing for the first rate increase into next year on some signs of weakening in domestic demand and the rising won.

"We still hold the view that the Bank of Korea will raise the policy rate early next year," said Moon Hong-cheol, a fixed-income analyst at Dongbu Securities.

"The won's appreciation is certainly a factor, but considering that the won's strength has limited effect on exporters compared with the past, it is unlikely that the bank will change its policy based on the currency movements."

Local markets were muted after the widely expected decision.

Asia's fourth-largest economy posted the worst fall in exports in eight months last month on cooling demand from its top market, China, although the annual rate of change was also affected by longer holidays this year than last year.

The central bank will release its latest economics forecasts for this year and next year in July, where it may slightly lower its latest growth forecast of 4 per cent for this year as the recovery in both domestic demand and exports is seen to slow.

The won has strengthened by more than 10 per cent over the past 12 months against the US dollar and looked set to breach the symbolically important 1,000-per-dollar mark for the first time in six years.

Government officials have showed a more tolerant stance than before towards the rising won, acknowledging it was driven mostly by huge current account surpluses and an upbeat economic outlook rather than by short-term speculation.

But the rising won could still have the effect of keeping local inflation low for an extended period and of raising concern among export industries about their price competitiveness globally or about shrinking profits from export earnings.

Inflation still remains well below the central bank's target band of 2.5 to 3.5 per cent but is slowly on the rise, as inflation rose to a 19-month high last month of an annual 1.7 per cent, lending support to views for an interest rate increase.