GO
Loading...

Why Bank of Korea Is Right Not to Cut Rates

SeongJoon Cho | Bloomberg | Getty Images

The decision by South Korea's central bank not to cut rates may have surprised markets on Thursday, but analysts told CNBC the Bank of Korea (BOK) was doing the right thing by keeping rates steady for the sixth straight month.

"This is a sign of rational and clear thinking on the part of the central bank. Rates are already accommodative," Wai Ho Leong, senior regional economist at Barclays Capital said in reaction to the BOK move to keep its base rate at 2.75 percent.

The central bank had plenty of ammunition to cut interest rates on a strengthening won against the yen, rising tensions with North Korea, risks surrounding Europe and a falling housing market, together with pressure from the government to ease policy.

(Read More: 'Very High' Chance North Korea Will Fire Missile, US and South Korea Say)

But economists said an estimated 12 trillion won ($10.6 billion) supplementary budget expected from the government next week will provide enough fiscal stimulus for the economy, while the BOK stands pat on rates. The central bank cut its 2013 economic growth forecast to 2.6 percent from the previous 2.8 percent on Thursday.

"We estimate the fiscal impulse from the expected stimulus to be similar to three 25 basis points rate cuts, which implies the package could negate the need for monetary easing in the short-term," Leong said.

Easing Cycle Over

Ronald Man, economist at HSBC, meanwhile, says the BOK's easing cycle is over as the central bank is more concerned about inflation, which appears to have bottomed out, but will rise in the second-half.

(Read More: South Korea Won at Fresh 7-Month Low Amid North Korea Risk, Bonds Rise)

"While it's true headline consumer inflation is very low right now, 1.3 percent, it is expected to rise a bit faster than what markets have currently priced in over the second-half of this year and this is what the BOK has to take account for," said Man.

The BOK did say on Thursday that it expected consumer prices to rise above 3 percent year on year in the second half of 2013.

(Read More: South Korea Top Exporters Already Hit by Weak Yen)

Matthew Circosta, economist at Moody's Analytics backed that sentiment, saying the BOK will look towards tightening policy to anchor inflation expectations.

"Low inflation is not expected to last as demand-side inflation pressures reassert themselves as GDP growth accelerates from the second half of 2013," Circosta said adding that there's "a long period of steady rates ahead."

-By CNBC.com's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu

Contact Central Banks

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    To learn more about how we use your information,
    please read our Privacy Policy.
    › Learn More