SEOUL, Feb 14: South Korea’s central bank held interest rates steady for a fourth straight month on Thursday, as expected, but warned that Japan’s expansionary monetary policy could impact future growth as a weak yen could undercut Korean exporters’ competitiveness.
Though Thursday’s decision to leave the base rate unchanged at 2.75 percent was not unanimous, the central bank said it expects the domestic economy to continue improving.
‘Our current monetary policy is already accommodative,’ BOK Governor Kim told reporters at a briefing following the rate decision after he was asked whether the central bank’s easing cycle had ended.
Seventeen analysts out of 21 surveyed by Reuters prior to the rate decision expected the central bank to hold its policy rate steady.
February’s rate meeting was the last during the administration of outgoing President Lee Myung-bak before his successor, Park Geun-hye, takes office on Feb. 25.
Despite the myriad problems she faces in office, Park has yet to announce detailed policies to support flagging job growth and ease the household debt burden in South Korea – two festering problems she has vowed to beat.
The Bank of Korea cautioned that uncertainties stemming from economic risks in the euro zone and fiscal consolidation in the United States continued to pose downside risks.
‘In terms of the future growth path however, there are some potential uncertainties, related for instance to fiscal tightening in advanced countries and to the new Japanese government’s expansionary policy operations,’ the Bank of Korea said in a statement accompanying its rate decision.
The comments were made before the Bank of Japan’s decision to maintain its current monetary policy.
At the customary post-meeting media briefing, BOK Governor Kim Choong-soo did not make direct reference to Japan, but the central bank’s warning over Tokyo’s policies appeared to reflect concern that the rapid depreciation of the yen could undermine South Korean exports.
The won is up 5.6 percent against the yen so far this year after a 22.8 percent climb last year.
South Korea, along with other trade-dependent and emerging market economies, is expected to raise its concerns about the effects of quantitative easing by major economies at the G-20 meeting in Russia later this week.
Some emerging market economies offering higher yields have attracted inflows of funds borrowed cheaply elsewhere, which have put upward pressure on their currencies.
Analysts say though that the Bank of Korea is unlikely to cut interest rates simply because of the yen’s depreciation, reckoning that regulators are more likely to tighten rules on foreign-currency trading to relieve potential upward pressure on the won.
‘A further rate cut will only bring rates down to 2.50 percent, which is still significantly higher than the very low interest rates seen in the United States, Euro area and Japan,’ HSBC economist Ronald Man said, adding that he believes the central bank’s easing cycle has ended.
GROWING UNCERTAINTY ABOUT NEXT RATE MOVE
Financial markets are becoming increasingly split on whether the Bank of Korea will ease further this year.
In the Reuters survey conducted this month fewer analysts predicted additional rate cuts this year compared with January’s tally as economic conditions in South Korea’s overseas markets have improved.
The central bank said in its 2013 policy statement late last year that due to entrenched domestic problems, it would concentrate on supporting economic growth because recovery in the economy, Asia’s fourth-largest, would be slow.
South Korea’s exports, however, grew faster than expected in January and industrial output grew for a fourth consecutive month in December, reinforcing expectations for a gradual recovery this year.
Hana Daeto Securities fixed-income analyst Kim Sang-hoon expected the Bank of Korea will likely keep the policy rate unchanged throughout 2013, given improving external conditions.
(AGENCIES)
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