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BOK tipped to hike key rate in May or July

Feb. 28, 2018 - 09:40 By Yonhap

South Korea's central bank is expected to raise its key interest rate in May or July in an effort to cope with rising US rates, analysts said Wednesday.

In a widely expected move, the monetary policy board of the Bank of Korea held the base rate steady at 1.5 percent, maintaining its wait-and-see stance. In November last year, the bank jacked up the borrowing cost for the first time in more than six years, citing signs of economic recovery.

The decision to freeze the rate had been widely expected as BOK Gov. Lee Ju-yeol had stressed that he would keep an accommodative monetary policy to bolster economic growth. It was Lee's last rate decision before his term ends in mid-March.

The rate freeze comes amid growing expectations that the US Fed may raise interest rates three to four times this year, leading to a reversal of key rates in both countries.

The Fed has recently adopted an interest rate range of 1.25 percent to 1.5 percent. Should the US central bank increase the rate by a quarter point next month as expected, South Korea will have a lower key rate than the US for the first time in more than 10 years.

In addition, Asia's fourth-largest economy is faced with intensifying downside risks this year, including trade pressure from the United States and a potential fallout from ongoing corporate restructuring efforts, which could dent its recovery, according to analysts.

Bank of Korea Gov. Lee Ju-yeol holds a news conference after a monthly rate-setting meeting at the central bank in Seoul on Tuesday. (Yonhap)

"In order to counter a potential rate reversal in South Korea and the US, the BOK is likely to hike the benchmark interest rate in May," said Yoon Yeo-sam, a researcher at Meritz Securities Co. "It is expected to carry out a rate increase only once this year."

Lee Mi-seon, a senior researcher at Hana Financial Investment Co., echoed his view.

"Considering the forecast of the Fed's rate hikes and South Korea's brisk exports, the BOK may increase the key rate in April or May," she said.

But she added there is a possibility that the South Korean central bank conduct an additional rate raise during the second half of the year.

Kang Seung-won, a researcher at NH Investment & Securities, forecast the BOK to jack up the benchmark rate in July after confirming the Fed's rate decision in June.

"The BOK may need a considerable time to assess the tendency of the current economic recovery, given uncertainties arising from Washington's trade pressure and General Motors' shutdown of a plant in South Korea," he said.

GM Korea, the local unit of the US carmaker, shuttered its unprofitable plant in Gunsan, 270 kilometers south of Seoul, seeking ways to pull out of the South Korean market.

Market watchers, meanwhile, said a rate reversal in South Korea and America would have a limited impact on the outflow of foreign capital.

Speaking with journalists after the rate-setting meeting, BOK Gov. Lee stressed that a sudden outflux of foreign money will not happen immediately.

"A foreign capital outflow has been caused not only by the interest rate spread but also by economic conditions, inflationary trends, foreign exchange and risk appetite in the global financial market," he said. (Yonhap)