BOK freezes policy rate at 1.5% for May

South Korea's central bank on Thursday held its key rate steady for May amid signs of an economic downturn and low inflation pressure.

In a widely expected move, the monetary policy board of the Bank of Korea voted to keep the policy rate unchanged at 1.5 percent, extending its wait-and-see stance to six months.

In November last year, South Korea's central bank adjusted up the key rate for the first time in more than six years, citing economic recovery.

Gov. Lee Ju-yeol said the rate-freeze decision was made in a unanimous vote.

"The Board judges that the solid trend of domestic economic growth has continued, as consumption and exports have shown favorable movements although facilities investment has slowed somewhat," the central bank said in a statement. "Going forward, the Board expects domestic economic growth to be generally consistent with the path projected in April."

But it said the tightened job market weighs heavily on the economy.

Last month, the BOK released a forecast of 3 percent expansion for 2018, unchanged from its earlier projection made in January.

Earlier in the morning, Finance Minister Kim Dong-yeon also said the South Korean economy is judged to be on a course toward 3 percent growth this year and the government has no immediate plans to revise its annual target.

"Looking ahead, the Board will conduct monetary policy so as to ensure that the recovery of economic growth continues and consumer price inflation can be stabilized at the target level of a medium-term horizon, while paying attention to financial stability," the central bank said. "As it forecast that inflationary pressure on the demand side will not be high for the time being, while the domestic economy is expected to continue its solid growth, the board will maintain its accommodative monetary policy stance."

Gov. Lee said the 4 trillion-won ($3.7 billion) extra budget, which was endorsed by parliament, will have a positive impact on the economy. The spending plan in addition to the 410 trillion-won budget for 2018 is aimed at creating jobs for young people and helping industrial regions grappling with massive layoffs.

But he warned that the economy is facing intensifying uncertainties at home and abroad, citing that Argentina sought aid from the International Monetary Fund. Many are worried that such financial jitters may spread to Asia and South Korea, and cause a financial crisis.

"It is true that uncertainties have been rising rapidly as we see financial turbulence in some emerging economies. We will not let our guard down against such uncertainties," said the central bank chief in a press briefing. "We will check all effects before our upcoming economic forecast slated for July."

The market broadly anticipated the rate freeze by the BOK at the May meeting as latest economic data showed that Asia's fourth-largest economy seems to be in a downside cycle.

Recently, Gov. Lee said the South Korean economy faces strong headwinds in the coming months, saying, "It has become hard to be optimistic."

The country's job creation remains weak -- the number of new jobs in the backbone manufacturing sector declined amid restructuring in the labor intensive shipping and automaking industries. Earlier, the central bank lowered its estimates for job creation to 260,000 from a previous projection of 300,000.

At the same time, household debt is on a steady rise and reached a record 1,468 trillion won ($1.36 trillion) in the first quarter of this year.

Consumer price inflation has been hovering around 1.5 percent for months, far lower than the BOK's target of 2 percent.

Also, uncertainties are building around the world due to the possibility of a trade war between the United States and China. The world's biggest and second-biggest economies are South Korea's No. 1 and No. 2 trade partners.

Seoul's exports fell 1.5 percent on-year in April, the first negative growth in 18 months due to a sharp drop in overseas sales of vessels.

Moreover, the strengthening of the local currency will likely undermine price competitiveness of South Korean goods in the global market. The Korean won averaged 1,067.76 won against the US dollar in April, up from an average 1,071.89 won in March.

But some watchers said the BOK is seeking the best timing to raise the key rate in the second half in a way to keep up with the US Fed's rate hike schedule for 2018. Following the Fed's latest increase in March, South Korea's base rate stands at 1.5 percent, compared with the US range of 1.5-1.75.

About Seoul's latest decision to reveal its records on currency market intervention, the central bank chief said that it does not mean that the authorities will opt for a hands-off attitude in all circumstances.

"The government and the BOK have adhered to the principle that the foreign exchange rate is determined by the market, and take market stabilizing measures in case of a sudden change," Lee said. "Despite the disclosure of currency market information, we will keep carrying out necessary measures to stabilize the market." (Yonhap)