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(2nd LD) BOK holds key rate steady despite signs of sluggish economy

All News 13:58 March 10, 2016

(ATTN: UPDATES with remarks from BOK governor, additional information in paras 6-9, 15-19; RESTRUCTURES; ADDS additional photo)
By Byun Duk-kun

SEOUL, March 10 (Yonhap) -- The Bank of Korea (BOK) left its key rate unchanged Thursday, again extending its wait-and-see mode despite signs of slowing economy and exports.

In a widely expected decision, the central bank's monetary policy board kept the base rate frozen at a record low of 1.5 percent for March.

The board cited a growing volatility in the global financial market as one of the reasons for its decision to keep the base rate frozen for the ninth consecutive month.

"The board forecasts that the global economy will maintain its recovery going forward, albeit at a moderate pace, centering around advanced economies, such as the United States, but judges that it will be affected by factors, such as financial and economic conditions in China and other emerging market countries, international oil price movements and global financial market volatility," it said in a released statement.

The BOK has stood pat on the key interest rate since July after delivering four rate cuts in less than a year to bolster growth in South Korea.

BOK Gov. Lee Ju-yeol noted the global financial market has come to be somewhat stabilized since the BOK's last rate-setting meeting in February but said uncertainties surrounding the local market have grown partly due to recent provocations from communist North Korea.

"We believe uncertainties in the global financial market have somewhat eased," he told a press briefing. "However, when considering all external factors, we believe uncertainties surrounding the country's growth path continue to remain high."

Tensions between South and North Korea have been escalating since the communist North conducted its fourth and latest nuclear test, followed by the launch of what the North claimed was a satellite. Many believe the satellite claim is a disguise for a long-range missile that has resulted in fresh U.N. Security Council sanctions.

Pyongyang again fired a pair of short-range missiles earlier in the day in an apparent protest against the recent U.N. Security Council decision and an ongoing joint military exercise between Seoul and Washington.

Thursday's decision is in line with an earlier poll by Yonhap Infomax, the financial news arm of Yonhap News Agency, in which 11 out of 19 economists surveyed forecast the central bank to keep its key rate frozen for March.

However, the decision comes amid growing signs of a slowdown in Asia's fourth-largest economy.

South Korea's exports have dropped for 14 consecutive months since the start of last year, plunging 12.2 percent on-year in February alone.

Domestic consumption, one of two main pillars of growth, has also been on the decline, with an index gauging the sentiment of consumers here dipping to an eight-month low in February.

"The trend of a decline in exports and the weakening recovery of domestic demand activities, such as consumption, are continuing, while the sentiments of economic agents have been sluggish," the BOK board noted.

Lee insisted the key rate was currently at a level that is "accommodative enough" to support growth.

"The current level of 1.5 percent is accommodative enough. It will be more accommodative if we lower it, but we hold a consistent view that the current key rate is accommodative enough," he told the press briefing.

The top central banker also questioned the effectiveness of a rate cut under current conditions.

"I believe the effect of a rate change on the real economy may be limited in an environment where external conditions remain uncertain, such as now," Lee said.

"This does not mean a rate cut will have no effect, but whether the mechanism or various channels through which a rate change has its impact on the real economy will work under current conditions is an issue that needs to be considered," he added.

Economists have pointed out growing household debt as a factor that may prevent an additional rate cut for at least some time.

The monetary policy board also acknowledged that the household debt has been growing "at a level exceeding that of recent years." The country's household credit, which represents total household borrowing, was at a record high of 1,207 trillion won (US$993.4 billion) as of end-December.

In the Infomax poll, a whopping 15 out of 17 economists forecast the BOK to lower its key rate to at least 1.25 percent by June.


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