Bank of Korea keeps interest rates steady as economic risks rise

  • South Korea's central bank trimmed its 2019 growth forecast to a seven-year low of 2.6 percent and kept its policy rate unchanged on Thursday.
  • This reinforced expectations it could stand pat for some time amid conflicting risks to the economy.
  • The economy grew 2.7 percent in 2018 underpinned largely by government spending, but growth marked a six-year low as China's slowdown and the U.S.-China trade war threatened to dent global growth and demand for South Korea's exports.
Signage for Bank of Korea (BOK) is displayed atop the central bank's headquarters building in Seoul, South Korea, on Thursday, Aug. 16, 2018.
Jean Chung | Bloomberg | Getty Images
Signage for Bank of Korea (BOK) is displayed atop the central bank's headquarters building in Seoul, South Korea, on Thursday, Aug. 16, 2018.

South Korea's central bank trimmed its 2019 growth forecast to a seven-year low while keeping its policy rate unchanged on Thursday, reinforcing expectations it could stand pat for some time amid conflicting risks to the economy.

The Bank of Korea now sees the economy growing 2.6 percent this year — the lowest since 2012 and slightly below its earlier projection of 2.7 percent — as slowing global growth threatens to put the brakes on the country's stellar export performance.

Asia's fourth-largest economy grew 2.7 percent in 2018 underpinned largely by government spending, but growth marked a six-year low as China's slowdown and the U.S.-China trade war threatened to dent global growth and demand for South Korea's exports.

In spite of rising economic headwinds, Governor Lee Ju-yeol has repeatedly emphasized that it is too early to discuss interest rate cuts as a significant downturn in the economy is still an unlikely scenario.

"It is a fact that there are risks of growth slowing down with weakening global growth. For now, a significant downturn in (South Korean) recovery is unlikely though," Lee told a news conference after leaving the base rate unchanged at 1.75 percent on Thursday.

The Korean won and shares barely reacted to the policy announcement.

A Reuters poll of 11 economists had expected the central bank to keep policy unchanged after it raised rates in November for the first time in a year. The moved was aimed mainly at containing a boom in parts of the country's property market.

"We're unlikely to see any changes in monetary policy this year unless the economy comes under external shocks from abroad," said Kim Sang-hun, an analyst at KB Securities.

"Lee himself made it clear that it's not the right time to discuss interest rate cuts just yet."

Rates seen on hold

Economists say a combination of falling exports, China's slowdown and a weaker labour market pose downside risks, making it more than likely that rates will stay on hold this year especially as the pace of U.S. policy tightening slows.

Adding to the dour mood, December exports unexpectedly slipped as shipments to China declined 14 percent on-year, the fastest fall in more than two years. The jobs market is also at its weakest in years, with unemployment at a 17-year peak.

On Thursday, the world's second-biggest memory chipmaker, South Korea's SK Hynix, flagged a tough first-half due to U.S.-China trade frictions and China's slowing economy, as its fourth-quarter profit missed market forecasts.

Seven out of the 11 economists surveyed in the poll said slowing inflation amid cooling global demand would allow the BOK to sit tight through the rest of this year.

South Korea is heavily leveraged to global trade so any deceleration in demand for its memory chips, petrochemical products and cars will likely be negative for its economy.

Governor Lee acknowledged the economy could face "considerable burden should a prolonged downturn continue in the semiconductor industry," when asked to comment on shrinking demand for South Korea's memory chips.

The BOK also downgraded its forecast for headline inflation this year to 1.4 percent, down from 1.7 percent estimated in October.