In a widely expected move, South Korea's central bank left the base rate on hold at a record low of 2 percent on Thursday as the government is upping the ante on structural reform over short-term policies to bolster growth.
With the latest move, the Bank of Korea extended its wait-and-see stance to a third straight month after slashing the base rate by a quarter percentage point twice, in August and October, last year.
"The monetary committee voted to keep the base rate on hold given that the economy is likely to show growth on par with the potential growth rate and that while the inflation forecast is lower, this mostly stems from a fall in oil prices," BOK Gov. Lee Ju-yeol said.
"Furthermore, we considered the need to be more cautious on financial stability as household debt is substantially rising," Lee said, adding the policy decision was unanimous.
The top central banker noted that consumption and investment are not recovering as much as expected as income growth is feeble and household debt is still at a high level.
But Lee said the ailing property market, which is an important factor in boosting consumer sentiment, is likely to gain traction this year on eased regulation.
The rate freeze is in line with a poll by Yonhap Infomax, the financial news arm of Yonhap News Agency. A majority of 20 of 22 analysts had projected the BOK to hold the rate this month, citing the government's growing focus on structural reform.
The surveyed analysts, however, forecast the central bank to go ahead with an additional rate cut in the first quarter as growth outlook remains dim. Twelve analysts expected a rate cut, while 10 others forecast the base rate to remain unchanged.
Some analysts had also raised views that the government's new push for structural reform may further dampen growth in the short-term and eventually lead to a rate cut.
"We believe that the BOK will cut rates to limit the short-term downside risks to growth stemming from structural reforms. Indeed, Lee's comment on the need for structural reform suggests to us that such reform is, in fact, one of the preconditions for further monetary easing," Nomura economist Kwon Young-sun wrote in a Jan. 13 report.
Lee, however, rebutted the view, saying structural reform will not prompt an economic slowdown under current circumstances. He also reiterated that the present base rate is sufficient enough to support growth in the real economy, ruling out a zero-interest rate scenario.
"If the economy derails from our forecast, it should be coped with through monetary policy measures... But since economic growth is matching the potential growth rate and low consumer prices mostly stem from supply issues, it seems that (using) monetary policy is inappropriate (at this point)," he said.
Lee Jae-hyung of Yuanta Securities Korea said the central bank is likely to postpone shifting its stance dramatically.
"Since there is a consensus that the U.S. economy is recovering, unless there is a significant change in the situation that can affect Korea's fundamentals, there is no reason for the central bank to change its policy stance," he said. (Yonhap)
