Central Banks

South Korea central bank holds rates amid political scandal, hawkish Fed

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South Korea's central bank held its key policy rate steady at a record low of 1.25 percent on Thursday, as authorities sit tight in the face of a political crisis at home and the U.S. Federal Reserve's signal to raise rates at a faster-than-expected pace.

The Bank of Korea's monetary policy committee held its base rate steady, a media official said, just hours after the Fed raised rates for the first time this year and sent global investors scrambling to adjust positions with its hawkish stance.

All 20 analysts surveyed in a Reuters poll before the decision had correctly forecast the BOK's on-hold decision. A majority of the analysts predicted no change for some time.

Thursday's decision comes as South Korean policymakers grapple with a political scandal that has embroiled President Park Geun-hye and raised fresh risks for Asia's fourth-biggest economy.

Park looks set to lose her job after lawmakers overwhelmingly voted to impeach her last week over an influence-peddling scandal. The Constitutional Court has to decide within 180 days whether to uphold the vote.

The Fed rocks the boat

"We see rates on hold until the end of next year," said Yoon Yeo-sam, a fixed income analyst at Mirae Asset Daewoo Securities.

"Rates in the U.S. are expected to rise faster than we expected and we are aware of the downside risks the economy faces, but it will not be easy for the BOK to cut rates," Yoon said, underscoring the risks of capital outflows from one of the most vulnerable emerging market economies in Asia.

Yoon added that monetary policy will remain neutral in the new year as household debt still remains a burden.

South Korea's economic recovery has stuttered over the past two years in the face of slack global demand and tepid private consumption.

The won and stocks fell early on Thursday following the Fed's signal to increase interest rates at a faster pace than markets had anticipated, bringing a quick reaction from Seoul to take steps to stabilize markets if needed.

The Fed's rate rise of 25 basis points to 0.50-0.75 percent was well flagged but the "dot plots" of members' projections showed a median of three hikes next year, up from two previously, leaving investors scrambling to adjust position.

South Korean Vice Finance Minister Choi Sang-mok said the government is on high alert for any extreme market volatility, but expects no major shakeout if the Fed policy path is communicated clearly.

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