Interest Rates

Bank of Korea holds rates steady at 1.50%

SeongJoon Cho | Bloomberg | Getty Images

South Korea's central bank kept interest rates unchanged at 1.50 percent on Thursday, as expected, as it assesses the effect of previous policy easing on the struggling economy and waits for the U.S. Federal Reserve to start raising rates.

Speaking after the rate call, Bank of Korea Governor Lee Ju-yeol said that the decision to hold rates was unanimous.

"We are certain our previous rate cuts have had a positive effect on the economy so far," he told a press conference.

All 27 analysts in a Reuters poll forecast the central bank would hold rates steady this week, and a majority of them said rates would remain unchanged through the end of the year.

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"We expect that the BOK will keep interest rates steady until the end of this year," said Moon Hong-cheol, a fixed-income analyst at Dongbu Securities. "China's devaluation of the yuan can be one of the factors for a BOK rate cut, but other factors should be satisfied to cut rates."

Markets shrugged off the decision as it was widely expected.

Traders were instead focused on a news conference by the People's Bank of China (PBOC), which market participants expected to provide explanation over China's decision this week to devalue the yuan in the wake of weak economic data.

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Finance Minister Choi Kyung-hwan said on Wednesday the move was taken by China partly to boost its export competitiveness, which is in turn expected to prop up exports from South Korea.

The central bank Governor said on Thursday that the BOK was monitoring the yuan's progress.

"We are being cautious and closely observing exchange rates as one-sided movement or excessive movements in the market are undesirable," he said.

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The BOK has cut rates four times since last year, the last time in June, as weak exports and sluggish domestic demand drag on the economy.

The South Korean central bank is now expected to sit pat for the coming months as the Fed gears up to make its first interest rate hike in nearly a decade. Policymakers have voiced confidence that even if U.S. rates are raised, it will have limited impact on financial markets in South Korea.

The BOK Governor said that the central bank had made preparations in case the Fed decision set off global financial jitters, but that it expected outflows after a rate hike to be limited.

Exports have fallen throughout this year amid uneven global demand, and analysts have said it will be difficult to see a firm recovery in shipments until the fourth quarter of this year.

"The global economy is expected to keep improving centred around advanced economies like the U.S., but changes in the U.S. Federal Reserve's monetary policy and increased financial market turmoil after the devaluation of the yuan by China may affect growth, along with weak growth in emerging market economies," Lee Ju-yeol said.