Bank of Korea holds key rate amid uncertainty

South Korea's central bank kept its benchmark interest rate steady Thursday for the sixth month in a row, extending its wait-and-see mode ahead of a looming U.S. rate hike.

In a widely expected decision, the Bank of Korea froze its base rate at 1.5 percent after sending it to a record-low level through four rate cuts in less than a year since August 2014.

The decision comes amid growing concerns over a possible U.S. rate hike, the first of its kind in nearly a decade, which could prompt a mass outflow of foreign capital from the country and other newly emerging market countries.

BOK Gov. Lee Ju-yeol said the possibility of a U.S. rate hike before the year's end was very high, but reiterated its impact on the local economy will be limited.

"As I said before, a rate hike by the U.S. Federal Reserve has long been anticipated and a large part of such anticipation has already been reflected in our base rate," the central bank chief told a press briefing.

"In fact, because a U.S. rate hike has been widely expected and the rate of the rate hike is expected to be gradually, we believe the impact on the financial market will be limited," he said, adding the monetary policy board's decision to freeze the key rate was unanimous.

The U.S. Fed's Federal Open Market Committee is set to hold its rate-setting meeting on Tuesday and Wednesday (U.S. time).

The BOK governor acknowledged the impact from a U.S. rate hike could get out of control should it cause problems or a financial crisis in what he called especially weak emerging market nations.

"The most concerning issue is that there are certain emerging countries that are especially vulnerable financially and in other ways. I am most concerned about the fallout from a possible financial crisis in such countries spinning off to other nations," he said.

The top central banker said the BOK had contingency plans to deal with heightened volatility in the financial market, but refused to provide any details.

Still, Lee said a U.S. rate hike will neither immediately nor automatically lead to a rate hike here.

"To give you the conclusion first, a rate hike by the U.S. Fed does not (directly) lead to a rate hike by the BOK. Should the BOK decide to raise its rate, it will have been based on all global factors, such as movements in the global financial market and economic conditions in newly emerging market countries, and not only the U.S. rate hike itself," he said.

On the domestic front, the BOK chief said the country's economy will continue on a recovery path, but that external uncertainties also stemming from slowing economic growth in China will also continue to run high.

South Korea's gross domestic product expanded 1.3 percent in the third quarter from three months earlier, marking the sharpest on-quarter gain in over five years, due mostly to a rise in domestic consumption apparently helped by record-low interest rates.

Exports, on the other hand, have dipped every single month since the start of the year, plunging 15.8 percent on-year in October, the fastest rate of drop in over six years. Exports in November slipped 4.7 percent on-year.

The BOK governor said the country's exports were expected to continue declining for some time, partly due to the low global oil prices and global economic downturn.

According to data provided by the BOK, China's economy grew 6.9 percent in the third quarter, slowing from a 7 percent on-quarter expansion in the previous quarter, while the country's exports slipped 7 percent on-month in October, quickening from a 3.8 percent decline in the previous month.

Slowing growth in China has often been blamed for the decline in South Korea's exports, as the neighboring country is the world's single largest importer of South Korean goods.

"Looking ahead, while working to sustain the recovery of economic growth, the board will conduct monetary policy so as to maintain price stability over a medium-term horizon and pay attention to financial stability," the BOK said in a released statement on its monetary policy decision.

Thursday's decision is in line with an earlier poll by Yonhap Infomax, the financial news arm of Yonhap News Agency, in which all 14 economists surveyed projected another rate freeze in December. (Yonhap)