The Korea Herald


BOK freezes key rate on emerging market woes

By Son Ji-hyoung

Published : May 24, 2018 - 15:31

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South Korea’s central bank kept the interest rate steady at 1.5 percent for six straight months in a unanimous board decision Thursday, citing external uncertainties due to an upshot in capital influx and currency woes from emerging markets.

Despite relatively solid economic growth at home and abroad, the lingering uncertainties and low inflationary pressure on the demand side here led to the “accommodative monetary policy stance,” according to the seven-member Monetary Policy Board of the Bank of Korea. 

BOK Gov. Lee Ju-yeol speaks at a press conference after the Monetary Policy Board meeting held in BOK headquarters in Seoul. (Yonhap) BOK Gov. Lee Ju-yeol speaks at a press conference after the Monetary Policy Board meeting held in BOK headquarters in Seoul. (Yonhap)
“Financial markets in some emerging market economies with weak external soundness have shown instability, as capital outflows from them have increased,” read the statement from the monetary policymaker.

The MSCI Emerging Markets Index had dropped by 2.7 percent as of Wednesday compared to end-April, despite the China Index’s upswing by 2.8 percent.

Currencies of Brazil and Indonesia depreciated by 3.7 percent and 2.2 percent against the dollar, respectively, over the cited period. During the same period, Brazil and Indonesia also saw their credit default swap premium soar 13.4 basis points and 18 basis points.

But BOK Gov. Lee Ju-yeol played down possibilities that external woes would hit hard the Korean domestic economy, adding the annual growth rate forecast at 3 percent is unlikely to be adjusted.

Korea’s robust external soundness, high foreign currency reserves and low level of short-term external debts would cushion the blow of financial instability from other emerging market nations, he said.

From end-April to Wednesday, Korea’s local currency weakened by 1.2 percent, while its CDS premium edged up 0.3 basis point.

Lee added the recent spike in crude oil price -- largely testing mid-$70 per barrel in May, from mid-$60 until March -- is unlikely to amplify inflationary pressure here.

This came after Lee said a week prior that an optimistic view toward the domestic economy is “hard to maintain,” citing growing uncertainties due to a pickup in the pace of monetary policy normalization in major countries, US-China trade conflict and emerging markets woes.

As for the domestic economy, the top financial policymaker pointed to tepid hiring trends. From February to April, Korea had a combined 338,900 new employees, according to the BOK, while some 334,200 people in January alone were employed.

Lee said it is hard to directly associate the minimum wage hike with sluggish employment.

The rate freeze came amid signs of the US Federal Reserve’s signal for the next rate hike in June, in meeting minutes of the Federal Open Market Committee on Wednesday.

The US Fed last raised the base rate in March, to a range of 1.5-1.75 percent. The news has sparked local concern that a US interest rate higher than the Korean one would trigger a capital flight here.

But Lee of the BOK downplayed the potential for capital exodus woes, citing Korea’s robust fundamentals, coupled with strong external soundness.

In November 2017, the BOK carried out the first rate hike in over six years, by 0.25 percentage point. 

By Son Ji-hyoung