BOK Governor Lee Ju-yeol
South Korea’s central bank on Thursday held the policy rate steady at 1.50 percent as widely expected amid concerns over domestic upsets despite the risk of falling behind the U.S. Federal Reserve`s tightening pace, vowing to keep monetary policy accommodative in line with signs of economic and inflation pickup toward target levels.
“The GM Korea crisis and U.S. trade pressure have raised the downside risk in growth,” said Bank of Korea (BOK) Governor Lee Ju-yeol in a press conference after presiding his last monetary policy meeting before the end of his single four-year term in March.
Sentiment could sour and interrupt the recovery in domestic economy, he said, adding the BOK for now is not revising down this year’s growth outlook of 3.0 percent.
If the U.S. Fed bumps up its benchmark rates in March as widely anticipated, the target range would be between 1.50 percent and 1.75 percent, hovering above the Korean rates for the first time since August 2007. The next monetary policy in Korea takes place in April.
Lee did not think foreign capital would suddenly pull out of Korean securities just because U.S. rates become higher.
“In the past, capital flight took place upon shock in international markets or uncertainties in emerging markets. Interest rate gap alone does not stoke foreign capital flight,” he said.
After delivering the first hike in more than six years in November and staying pat in January, the BOK board in February meeting agreed that monetary policy should stay “accommodative” as demand-side inflationary pressure is expected to stay subdued for some time.
“The board will closely watch growth and inflation levels and make prudent judgment on further adjustments in the accommodative level,” the BOK said in a statement.
The dovish tone suggests the BOK’s hikes would stop at one or two at best, although the U.S. Fed indicated a faster normalization process - as many as four increases this year - upon inflationary pressure driven by robust economic growth and employment.
The local markets were reassured by the BOK comments about placing domestic conditions first in monetary maneuvering.
The benchmark three-year government yield on Tuesday was down 0.5 basis points to 2.258 percent and the five-year bond down 1.3 basis points to 2.508 percent. The Kospi closed down 0.06 percent at 2,456.14 and the won rose 0.20 percent to 1,071.30 against the U.S. dollar.
Consumer prices rose 1 percent on year in January, slipping to a 17-month low. The central bank, which had previously lowered its inflation estimate to 1.7 percent for this year, projected inflation will pick up and gradually approach the target rate of 2 percent from the second half of this year.
But growth outlook also looks unsteady as domestic sentiment could be hurt if ongoing crisis at GM Korea spills over. Having shuttered Gunsan factory, General Motors indicated it could take additional steps with the rest of its operation if it cannot get aid from the government and concession from the union to reduce labor cost. The union is threatening to go on a full-scale strike, while the government maintains it cannot supply bailout unless it sees concrete and lasting turnaround plan from the Detroit-based automaker.
Moreover, the Korean Inc. faces a barrage of killer tariffs from Washington ranging from exports of residential washers and solar panels to mainstay steel.
Meanwhile, the president is yet to name Lee’s successor. There are some expectations that the BOK law could be revised to allow a second term for the governor and keep dovish Lee on board for another four years.
By Kim In-oh and Kim Hyo-jin
[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]