BOK stands pat, previous cuts and improving conditions in focus

As widely expected, South Korea's central bank on Friday left its policy rate frozen, citing slight improvements in the economic and trade conditions facing Asia's fourth-largest economy and the need to assess the effect of previous rate cuts.

The Bank of Korea's monetary policy board voted 5 to 2 to keep the rate steady at a record low 1.25 percent.

Friday's monetary policy decision was in line with market consensus. In a survey conducted by Yonhap Infomax, the financial news arm of Yonhap News Agency, all 19 experts polled anticipated a rate freeze in January.

"The board decided to keep the base rate at the current level, considering that external uncertainties have been somewhat eased by the progress in trade negotiations between the United States and China," BOK Gov. Lee Ju-yeol told a press briefing.

The decision to keep the rate steady comes shortly after the United States and China signed their phase one trade agreement, putting on pause their prolonged trade conflict, which has been partly blamed for a large drop in South Korean exports throughout 2019.

South Korea's exports have dropped for 13 consecutive months since December 2018, dipping 10.3 percent on-year to $542.4 billion -- the first double-digit drop in a decade.

The top central banker said the local economy was still expected to grow in line with the BOK's latest projection in November -- for 2.3 percent growth -- but now faces upside factors that have recently surfaced.

"The recovery in the local economy continues to be delayed, but when looking at each sector, some are showing signs of improvements," said Lee.

"The phase one trade agreement between the United States and China and the anticipated recovery in the global semiconductor industry are expected to have a positive impact on the local economy," he added.

Lee noted the US-China trade agreement may somewhat offset South Korea's exports to China, which has agreed to import an additional $200 billion worth of American goods and services from the 2017 level.

"If China expands its imports of US products, it may have a negative effect on (South Korean) goods that have a competitive relationship with US products in China," the BOK chief told the press briefing.

"But from a global perspective, the reduction of uncertainties may lead to China's economic recovery and a rise in global trade based on improved investor sentiments, which will have more of a positive impact on our exports," he said.

The BOK has kept the policy rate steady since October, when it delivered a quarter percentage point cut to match the all-time low of 1.25 percent.

The latest rate cut followed the board's first rate reduction in three years in July.

Even with two rate cuts in just three months, the BOK has been expected to again trim the base rate to support the local economy, which is estimated to have expanded 2 percent last year, the slowest growth since 2009.

The BOK chief earlier said the central bank will continue to maintain its easing stance in 2020 but first check the effects of the two previous rate cuts last year.

He again stressed the importance of financial stability, insisting the base rate is already accommodative enough.

"We believe the current monetary policy is accommodative enough. At the same time, there is a need to consider the risks from the financial stability perspective," Lee said when asked about the possibility of a rate reduction in the near future.

The board agreed with the need to wait and see amid signs of economic improvements.

"The board judges that the sluggishness in the domestic economy has eased somewhat," it said in a statement released shortly after its rate-setting meeting.

"The sluggishness in exports and facilities investment will gradually ease and the consumption growth rate will moderately rise," it added.

Such an outlook follows recent signs of a recovery in demand and prices for semiconductors, the country's single largest export item.

Weak global prices of memory chips led to a sharp drop in the value of South Korea's outbound shipments in 2019, despite an increase in their volume.

The country's exports of chips plunged 25.9 percent on-year to $93.9 billion in the year, while its overall exports dipped 10.3 percent to $542.4.

Signaling a possible recovery, the country's exports reached $13.3 billion in the first 10 days of the month, up 5.3 percent from the same period last year, according to earlier reports.

Samsung Electronics, the world's largest memory chip maker, has also reported better-than-expected fourth-quarter earnings last week, possibly indicating a recovery in global chip prices.

The central bank said it will continue to maintain an easing stance, noting the local economy is estimated to grow in the lower 2 percentage range this year.

"As it is expected that the domestic economic growth will be moderate, and it is forecast that inflationary pressure on the demand side will remain at a low level, the board will maintain its accommodative monetary policy stance," the released statement said. (Yonhap)