BOK sees room for more rate cuts, but wary

Bank of Korea Gov. Lee Ju-yeol said Tuesday that he saw room for further monetary easing to rejuvenate growth, but was not convinced that an additional interest rate cut would spur consumption and investment under the current circumstances. 

Meeting reporters after the central bank’s rate-setting board decided to freeze the base rate as widely expected, Lee said a further rate reduction from the current record-low level must be considered with caution, due to its potential negative impact on financial stability.

“A rate change has its intended effects and unwanted side effects,” Lee said. “Due to external uncertainties, it seems unclear to me now whether a cut would have its hoped-for effects, whereas the side effects look quite worrisome.”

Tuesday’s decision by the BOK Monetary Policy Committee left Korea’s seven-day repurchase rate unchanged at 1.5 percent for the eighth month running. The BOK last lowered the borrowing costs by a cumulative 1 percentage point via four moves from August 2014 till June 2015 to stimulate Asia’s fourth-largest economy amid flagging exports and feeble domestic demand.

The rate freeze was forecast by 99 percent of 100 bond-market participants in a survey.

Lee, however, revealed that the decision was by split vote as that one of the board’s seven members called for a cut. This was a departure from the past several months, when decisions -- all for freezing the rate -- were unanimous.

In a statement explaining the rate decision, the board also stated that while the Korean economy continues to recover, led by domestic consumption, “the uncertainties surrounding the growth path have increased.”

“The BOK appears to have moved closer to further easing, judging from the statement acknowledging increased downside risks to growth and the governor’s comment about there being scope for more cuts,” said Shin Dong-june, strategist at Hana Financial Investment in Seoul. Referring to the rate-advocating minority opinion, he noted that a reduction seems more likely in March.

Yields on Korean government bonds fell Tuesday on speculations of a March cut.

The yield on the benchmark three-year treasury note fell to 1.431 percent, the lowest on record, Korea Exchange prices show.

“The fact that a minority favored a rate reduction (in February) reinforced market speculations that a cut may be in store for March,” said Seo Hyang-mi, fixed income analyst at Hi Investment & Securities.

By Lee Sun-young (milaya@heraldcorp.com)