(Bloomberg) -- The Bank of Korea left its benchmark interest rate unchanged in Governor Lee Ju-yeol’s last policy meeting, as it weighs risks to its economic outlook with concerns about record household debt.
The decision to keep the seven-day repurchase rate at 1.5 percent was forecast by all 17 analysts surveyed by Bloomberg.
With only modest inflationary pressure, the BOK will continue to move cautiously in coming quarters, given external risks related to trade, monetary policy and geopolitics, Tuuli McCully, head of Asia-Pacific Economics at Scotiabank, said before the decision. “We expect the next rate hike to take place closer to mid-2018,” McCully said.
South Korea’s economy is on a solid footing. The BOK raised its 2018 growth forecast to 3 percent in January. It also trimmed its inflation forecast to 1.7% -- below its 2 percent target. Inflation sagged to 1 percent in January.
External risks to the outlook include stronger U.S. trade protectionism and a faster-than-expected Federal Reserve tightening cycle. The Fed is expected to raise rates as many as four times this year, compared with one or two hikes expected from the BOK.
That would push the U.S. benchmark rate higher than Korea’s and make South Korean assets less attractive. Yields on most Korean government bonds are already below those of U.S. bonds, reflecting diverging policy expectations.
Fed Watching
Lee said last week that any responses by the BOK to the Federal Reserve’s rate increases this year would depend on how they affect South Korea’s economy and inflation.
Economists in a separate survey said they saw the pace of Fed tightening, as well as softer inflation and household debt in South Korea, limiting policy options for the incoming BOK governor. Six of seven economists said their rate forecast would remain unchanged regardless of who is named the new chief.
Lee’s four-year term ends on March 31 and the presidential office hasn’t indicated who his successor might be. An announcement could come as early as this week. No law prevents Lee from serving another term, but it would be unusual. Analysts say President Moon Jae-in would want to appoint a new governor to make his mark on monetary policy.
Lee is scheduled to hold a news conference at 11:20 a.m. Investors will be looking for his assessment of the risk of capital outflows, as well as whether his economic outlook has changed since January.
The won has traded in a range this year after gaining strength during the fourth quarter of last year. It closed at 1,073.35 on Monday. The yield on three-year government bonds was at 2.27 percent on Monday.
