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BOK freezes key rate at record low of 1.5% in Nov.

Nov. 12, 2015 - 11:34 By KH디지털2

South Korea's central bank froze its benchmark interest rate at a record low of 1.5 percent for November on Thursday, as it continues to gauge the impact of its previous rate cuts amid recovering local demand and a looming U.S. rate hike.

This marks the fifth consecutive month the Bank of Korea (BOK) has kept the policy rate unchanged at the current level since it slashed the rate by a quarter percentage point in June to 1.5 percent.

For the past year, the central bank has cut a total of 1 percentage point to prop up Asia's fourth-largest economy faced with a slump in private spending and overseas demand.

Thursday's decision is in line with an earlier poll by Yonhap Infomax, the financial news arm of Yonhap News Agency, in which 18 out of 19 economists surveyed projected no change in the key rate.

"The board forecasts that the domestic economy will continue its recovery going forward, centering around domestic demand activities, but, in view of external economic conditions, judges the uncertainties surrounding the growth path to be high," the BOK monetary policy committee said in a statement after its monthly rate-setting meeting.

The latest rate-freeze decision was unanimous, the BOK said.

The BOK governor opened the door for a possible rate cut in the near future but refuted claims that a zero-rate policy is necessary.

"On principle, there is room for an additional rate cut as we are at 1.5 percent now," said BOK Gov. Lee Ju-yeol said in a press conference. "But calls for a zero-rate level are excessive. They overlook the harmful side effects of a zero rate."

Some foreign investment banks earlier expected that the South Korean central bank will lower the rate further to as low as 1 percent next year to help revive domestic demand.

The BOK said that the global economy led by the United States and Europe has been recovering at a moderate pace, with some uncertainties, such as a shift in the U.S. monetary policy and a slowdown in China, still lingering.

Market watchers said it is difficult for the BOK to make another rate cut this month as the U.S. Fed is widely expected to raise the borrowing costs at its December meeting.

The Fed has said that the world's largest economy is ready to take on a rate hike for the first time in a decade, citing improving employment and other economic data.

Fed Chair Janet Yellen has earlier said that she would increase the key rate within the year.

"South Korea has better economic fundamentals, with steady trade surplus and ample foreign reserves. We don't expect serious side effects from a rate hike in the U.S.," said Lee, adding that the chances of the Fed's rate hike in December run high.

"But, we are closely watching the situation as heightened external risks such as rapidly spreading financial uncertainties in emerging markets can exert on the South Korean economy," he said.

Also, the BOK had to take cautious action as China, the country's biggest trading partner, seems to be heading for a hard landing.

In the latest economic data, China's consumer price index gained 1.3 percent on-year in October, slowing from a 1.6 percent rise in the previous month.

On the domestic side, the central bank wants to confirm that the South Korean economy is getting on a recovery track, although the central bank revised down the growth forecast for 2015 to 2.7 percent last month from 2.8 percent.

South Korea's economic growth reached a five-year high in the third quarter thanks to a strong rebound in domestic demand, getting out of a deep slump caused by the deadly Middle East Respiratory Syndrome outbreak in May.

The economy grew 1.2 percent on-quarter in the July-September period, the first time in five quarters that growth exceeded the 1 percent mark, while consumer spending rose 1.1 percent from three months earlier, a turnaround from a 0.2 percent drop in the second quarter.

But exports have been on a decline for seven straight months, with outbound shipments tumbling 15.8 percent on-year in October, quickening from a 8.4 percent on-year drop in the previous month.

"Although domestic demand activities, such as consumption and investment, have sustained their paces of recovery, while economic agents' sentiments have improved somewhat, the trend of declining exports has persisted," it said.

Gov. Lee added that slumping exports would constrain a recovery in domestic demand as the fourth-largest economy in Asia depends highly on exports.

"It's difficult to say that sluggish exports keep domestic demand from recovering, but it's true that they restrict (the pace of) recovery," he said.

The BOK also said its board had to take mounting household debts into consideration, which have been regarded as the biggest threat to the economy.

According to separate data, household loans extended by local lenders increased at the fastest clip last month, reaching 624.8 trillion won ($539.3 billion) as of the end of October, up 9 trillion won from the previous month.

"(The board) will closely monitor the trend of the increase in household debt and external risk factors, such as any changes in the U.S. Federal Reserve's monetary policy or in economic conditions in emerging market countries, including China, as well as the trends of capital flows," it said.

For the recent government-led corporate restructuring, Lee said it is the right time to weed out highly indebted and unprofitable companies in the face of a trend of higher rates, probably started by the U.S.

"A low rate trend has some adverse effects, including the rising number of such troubled companies," said Lee. "We've taken low-rate policies in order to revive a growth momentum of our economy, but now we have to go ahead with corporate debt restructuring."

The financial authorities have pushed local lenders to sort out troubled companies to get prepared for lingering economic uncertainties at home and abroad.

South Korean banks have been struggling from mounting bad loans extended especially to the shipbuilding sector, which posted unprecedented massive losses this year stemming from a worldwide slump in the industry.

Daewoo Shipbuilding & Marine Engineering Co., the country's No. 3 shipyard, suffered a third quarterly deficit of more than 3 trillion won, sounding the alarm for financial authorities and the entire business circle. (Yonhap)