BOK holds rate at 1.5% amid U.S.-China row

The Bank of Korea (BOK) left its main interest rate unchanged on Thursday, as a trade row between the United States and China and stubbornly low inflation clouded the prospect of export-driven economic growth.

In the first rate-setting meeting after the BOK head’s second term began, the central bank lowered its inflation forecast for 2018 from 1.7 percent to 1.6 percent while it maintained the country’s economic outlook at 3 percent after a unanimous decision.

Gov. Lee Ju-yeol said that the BOK kept the key rate at 1.5 percent amid uncertainties surrounding the trade disputes among Korea’s two largest trading partners, lower than expected inflation and major economies’ pace of monetary tightening.

The central bank is widely seen as on track to adjust the pace of expansionary monetary policy by switching toward a gradual rate hike backed by strong exports and improved domestic consumption.

It raised the interest rate in November for the first time in six years and five months.

Analysts predict that the move will be hampered by the same risks mentioned by the governor.

“It is now unlikely that the BOK will increase the interest rate twice this year,” said Shin Eol, fixed income analyst at Shinhan Investment.

“It is certain that a rate hike will not take place in the second quarter - so far there have been no clear economic indicators that could back the change.”

Majority of analysts believe that the first hike this year will occur in July.

The country’s consumer prices remained below 1.5 percent entering this year with the March index at 1.3 percent, which is below the central bank’s 2 percent target.

As for the ongoing trade disputes, however, Lee expected that it would not develop into a full-blown trade war.

“A consensus is that the tension between the two countries will not escalate into a full-blown trade war,” he said.

Oh Chang-sob, an analyst at Korea Investment & Securities, projected that more hikes are possible given the anticipated faster pace of monetary tightening by the U.S. Federal Reserve.

“Two hikes are expected potentially in the second half of this year,” the analyst said, “Still, since further rate rises are expected in the United States in the second quarter, the BOK would still feel pressured to raise the rate.”

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]