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(News Focus) Weak employment, economy cause BOK to freeze rate

All Headlines 14:26 October 18, 2018

By Kim Boram

SEOUL, Oct. 18 (Yonhap) -- The Bank of Korea (BOK) decision on Thursday to leave the key rate unchanged at 1.5 percent reveals that growing concerns over the apparent economic downturn overshadowed the need to strive for financial stability, analysts here said.

At its simultaneous quarterly review, the central bank slashed down the country's growth forecast to 2.7 percent from the 2.9 percent set earlier, with numbers sliding from 2.8 percent to 2.7 percent for 2019. This year's number is the lowest annual growth for Asia's fourth-largest economy since 2012.

The BOK earlier suggested 3.0 percent growth for 2018 in its January and April forecast, but it made two downward revisions in July and October.

The cut in the growth target had been largely expected after a revision by the International Monetary Fund (IMF) last week. The international organization downgraded the growth forecast by 0.2 percentage point to 2.8 percent for 2018, with a 2.6 percentage expansion being forecast for 2019.

(News Focus) Weak employment, economy cause BOK to freeze rate - 1

Moreover, worse-than-expected employment weighed heavily on Asia's fourth-largest economy.

South Korea's jobless numbers in the third quarter surpassed the 1 million mark for the first time since the country struggled with the fallout of the Asian financial crisis.

The number of newly added jobs stayed below 10,000 on-month for two straight months in July and August, fueling concerns that the economy is losing steam.

The South Korean government has been struggling to make a turnaround in employment, even after using the 3.9-trillion-won (US$3.69 billion) extra budget mainly for job-creation projects.

Experts, however, anticipate that the BOK will lift the key rate next month at its last monetary policy meeting of the year, as it has hinted at a rate hike before the end of 2018.

The central bank has been under pressure throughout the year due to high-flying real estate prices and ballooning household debt.

South Korea's household credit reached a record high of nearly 1,500 trillion won (US$1.33 trillion) as of the end of June. The large amount of liquidity that entered the property market led to the recent boom in prices.

As a number of the government's anti-speculative measures seems to have failed to bring down real estate prices, high-ranking government officials including Prime Minister Lee Nak-yon blamed the yearslong low borrowing costs for causing the overheated market.

For the government, a rate hike can be the best and clearest tool to cool down the overheated housing market.

The BOK was reportedly aware of the call, with Gov. Lee Ju-yeol having emphasized the BOK's role in redressing an imbalance in the financial field brought on by nearly a decade of low interest rates that have inflated real estate prices and household debt.

At the Thursday meeting, the central bank's tone became stronger to some extent, as the word "carefully" was removed from the statement on the monetary policy decision for the first time in a year.

"It doesn't mean that we will put the financial issue on the front burner and place the macroeconomic issues on the back," the BOK chief said in a press briefing. "But it means that we will focus more on financial stability issues than before if favorable macroeconomic conditions are set."

The widening interest rate difference between South Korea and the United States is another key issue for the central bank's latest rate-setting meeting.

As the U.S. Federal Reserve is about to make another rate hike in December, it may broaden the rate spread with South Korea to 1 percentage point if the BOK does not engage in rate adjustments.

A far wider rate spread may spark a foreign outflow from the South Korean financial market. Currently, more than 30 percent of the market capitalization of South Korea's benchmark KOSPI bourse is owned by foreign investors.

Gov. Lee earlier said that he takes into account the widening Korea-U.S. rate gap as a higher U.S. rate might affect the global financial market and investors' appetites as well.

(News Focus) Weak employment, economy cause BOK to freeze rate - 2


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