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(LEAD) BOK holds key rate steady at record low 1.25 pct for July

All News 13:56 July 14, 2016

(ATTN: ADDS remarks from BOK governor Lee Ju-yeol in paras 9-11, 13-18; RESTRUCTURES; TRIMS)
By Byun Duk-kun

SEOUL, July 14 (Yonhap) -- South Korea's central bank kept its policy rate frozen for July on Thursday, one month after it sent the key rate to a record low to bolster growth in Asia's fourth-largest economy.

In a widely expected move, the Bank of Korea's monetary policy board voted to keep the key rate steady at 1.25 percent.

The board made a surprise rate cut in June after holding the key interest rate steady at 1.5 percent for 11 consecutive months in what many saw as a pre-emptive step to boost local spending, one of two major pillars of growth here.

In the January-June period, the country's consumer prices gained only 0.9 percent from a year earlier, far short of the central bank's 2 percent target for the year.

Thursday's decision was in line with an earlier poll by Yonhap Infomax, the financial news arm of Yonhap News Agency, where all 12 economists surveyed forecast a rate freeze in July, noting a need for the BOK board to gauge the effects of its latest rate cut.

The monetary policy board offered a pessimistic outlook.

"Looking ahead the board forecasts that consumer price inflation will remain at a low level for the time being, and then gradually rise as the effects of the low oil prices diminish," it said in a released statement.

"The board will conduct monetary policy so as to ensure that the recovery of economic growth continues and consumer price inflation approaches the target level over a medium-term horizon," it added.

While speaking later in a press conference, BOK Gov. Lee Ju-yeol said sluggish spending and a prolonged slump in exports will further hamper growth this year.

The bank has revised down its 2016 growth outlook to 2.7 percent from 2.8 percent three months earlier, he said in the press briefing, adding the bank has also slashed its outlook on consumer price inflation to 1.1 percent from 1.2 percent.

"The local economy will maintain its modest growth trend on expansionary economic policies, but the bank believes local and external uncertainties surrounding the path to growth will remain high," he said.

Exports, also a main growth engine, have fallen every single month since the start of last year.

The top central banker noted the decline in exports will likely continue for some time.

"The recent slump in exports stems largely from external factors rather than domestic factors," he said, naming a dip in global trade as a major factor causing the decline in South Korean exports.

"Saying the country's exports solely depend on a recovery of the global economy would not be an exaggeration," the BOK chief added.

Lee said the central bank will maintain its easing stance to support economic recovery, but noted the fast growing household debt may limit policy options.

"The steep increase in household debt stems mostly from a rise in home transactions and sales in new homes, but the bank believes recent reductions in borrowing rates have also contributed," he said.

The country's overall household debt reached a record high of 1,223.7 trillion won (US$1,072 billion) as of end-March, breaching the 1,200-trillion-won mark for the first time in its history.

"We expect household debt to continue increasing at a fast clip for some time, though the rate of increase will likely slow from the record pace seen last year on government policies to limit the rise in household debt," the top central banker said.

bdk@yna.co.kr
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