S. Korea freezes policy rate at record low amid geopolitical risks

BY  | FROM  | 2017-08-31 15:31

South Korea's central bank on Thursday froze its benchmark interest rate at a record low for the 14th consecutive month amid rising geopolitical risks on the Korean Peninsula.

Bank of Korea (BOK) Governor Lee Ju-yeol and six other policy board members kept the seven-day repurchase rate on hold at 1.25 percent. The bank cut the rate to the current level in June last year.

It was in line with market expectations. According to a Korea Financial Investment Association (KFIA) survey of 100 fixed-income analysts, 99 percent predicted the rate freeze.

Citing geopolitical risks related to the Democratic People's Republic of Korea (DPRK), the BOK said in a report on Monday to the National Assembly that uncertainty mounted to the growth path of the economy.

Governor Lee said earlier this month that the DPRK-related risks would not become a one-off factor, noting that he was taking it seriously. Then, the top central banker vowed to actively respond to market volatility caused by DPRK provocations.

The DPRK on Tuesday fired an intermediate-range ballistic missile (IRBM), called Hwasong-12, which flew over the northern Japanese island of Hokkaido. It was the DPRK's first-ever test of a ballistic missile that passed over Japan, prompting the Japanese government to advise residents to take cover.

The UN Security Council condemned the DPRK's missile launch, and U.S. President Donald Trump warned that "all options are on the table" following the DPRK's test of a ballistic missile, which is banned under UN Security Council resolutions.

In July, Pyongyang tested what it called an intercontinental ballistic missile (ICBM), called Hwasong-14, twice. It led to a new UN Security Council resolution toughening sanctions on the DPRK.

The rising geopolitical risks on the peninsula discouraged the BOK from altering the record-low interest rate.

The BOK chief opened a possibility for a rate increase in June, saying a less accommodative monetary policy could be needed if economic situations are clearly improved.

In July, the central bank revised up its 2017 growth outlook for the South Korean economy by 0.2 percentage points to 2.8 percent.

Expectations emerged for the BOK to raise its growth forecast further in the upcoming revision date in October as the new government under President Moon Jae-in unveiled a supplementary budget plan to create jobs.

The geopolitical risks lowered the possibility for the BOK's rate hike, but pressures were projected to remain on the central bank to hike rates as the U.S. Federal Reserve hiked its benchmark rate to a range of 1.00-1.25 percent.

The U.S. interest rate came closer to the South Korean policy rate of 1.25 percent. If the rates between South Korea and the United States are reversed, foreign funds could abruptly flow out of the South Korean financial market.

Household debts in South Korea kept a record-breaking momentum as low borrowing costs encouraged households to purchase new home with borrowed money.

An economic advisor to President Moon said earlier this month that the prolonged low rate triggered problems in the real estate market.

The BOK cut its policy rate from 3.25 percent in July 2012 to the current level in June 2016. Mortgage loans surged for the past five years.

The government, which was inaugurated in early May, unveiled a set of measures to control speculative investment in the property market. It planned to unveil measures next month to rein in the massive household debts.

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