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(5th LD) BOK holds key rate steady at 1.25 pct in Sept.

All News 17:03 September 09, 2016

(ATTN: UPDATES with comments by BOK chief and analyst, BOK's emergency meeting)

SEOUL, Sept. 9 (Yonhap) -- South Korea's central bank on Friday held its policy rate steady for September, extending its wait-and-see mode for three straight months after sending the key rate to a record low level to strengthen growth for Asia's fourth-largest economy.

The monetary policy board of the Bank of Korea (BOK) voted unanimously to keep the key rate at 1.25 percent, as central bank officials have recently cited concerns about snowballing household debts and a possible rate hike in the United States.

Bank of Korea Gov. Lee Ju-yeol arrives at Incheon International Airport, west of Seoul, on Sept. 9, 2016, to leave for Basel, Switzerland, to attend a meeting of central bankers at the Bank for International Settlements. (Yonhap)

Bank of Korea Gov. Lee Ju-yeol said South Korea's key rate could move in line with a possible U.S. rate hike and the central bank is keeping a close eye on increased dollar-won volatility.

"South Korea's interest rates should be higher than those of the key currency country as it needs to take into account the danger of capital outflows as a small open economy," Lee said, referring to U.S. interest rates.

The won gained 6.75 percent against the dollar this year as of Friday.

Some analysts said they expect the BOK to leave its policy rate unchanged at 1.25 percent by the end of this year.

"It would be difficult for the BOK to lower the key rate at a time when the U.S. is likely to raise its rates in two months," said Lee Mi-seon, an analyst at Hana Financial Investment.

Last month, Federal Reserve Chair Janet Yellen said the case for an increase in the federal funds rate has strengthened in recent months, citing continued solid performance of the labor market and outlook for economic activity and inflation. Still, she did not provide any specific time frame for the possible rate hike.

In June, the central bank made a surprise rate cut, citing a need to support the economy.

The country's exports posted the first on-year rise in 20 months in August on the back of brisk demand for chips and flat displays. Outbound shipments came to US$40.1 billion last month, up 2.6 percent from the same month last year, according to government data.

Consumer spending, a major pillar of growth for South Korea's economy, grew 3.3 percent in the April-June period from a year earlier.

The country's consumer prices rose 0.4 percent last month from a year earlier, staying below the 1 percent level for four straight months, according to government data.

The monetary policy board noted some improvements in the domestic market, though it cautioned the local economy could face high uncertainties.

"Exports have increased slightly on the effects of transitory factors, and domestic demand activities appear to have continued their improvements," it said in a statement.

"The board forecasts that the domestic economy will sustain its trend of modest growth going forward, owing chiefly to expansionary macroeconomic policies, but in view of economic conditions domestically and abroad judges the uncertainties surrounding the growth path to be high."

In July, the BOK slashed its growth outlook for the year to 2.7 percent in its latest quarterly revision. The outlook marked a 0.1 percentage point cut from 2.8 percent three months earlier.

Friday's decision by the BOK board is in line with an earlier poll conducted by Yonhap Infomax, the financial news arm of Yonhap News Agency, in which all of 13 economists surveyed forecast the central bank to freeze the key rate in September.

Also Friday, the BOK vowed to take measures to stabilize markets in case of increased volatility following North Korea's nuclear test, though it did not elaborate on what it meant by stabilization measures.

The bank said it will strengthen monitoring of domestic and foreign financial markets, though the negative influence the North's fifth nuclear test has on South Korea's financial and foreign exchange markets could be limited.

The decision came in an emergency meeting at the central bank following the North's latest provocation on its founding anniversary Friday.

Lee later left for Switzerland to attend a meeting of central bankers at the Bank for International Settlements.


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