BOK expected to keep interest rate unchanged

Korea’s central bank will likely keep rates on hold at its monthly rate meeting today as emerging markets work through the U.S. Federal Reserve’s decision to keep trimming its stimulus.

A poll by Reuters found that the Bank of Korea is likely to maintain its monetary policy rate of 2.5 percent this month, with all 23 respondents seeing no change as the central bank monitors conditions outside the country.

Korea did not escape the heightened volatility in emerging markets in the run-up to the Fed’s meeting earlier in February, when it opted to continue tapering its bond-buying program.

However, Korean markets stabilized in a matter of days, with the won steadily recouping losses sustained after the Fed’s decision. And analysts believe Asia’s fourth-largest economy will remain steady.

“The risks that financial markets still face have not decreased dramatically, but South Korea is differentiated from economies that have had problems and will likely show stability from here on out,” said Kong Dong-rak, a fixed-income analyst at Hanwha Securities.

While other emerging-market countries have scrambled to increase interest rates to shield themselves from a torrent of capital outflows, South Korea is expected to stay on hold until inflation rises enough to require a boost in interest rates.

Analysts believe this won’t happen until late this year when the country’s negative output gap is expected to close.

An output gap is the difference between an economy’s actual output and its potential output.

Inflation averaged 1.3 percent last year, and the Bank of Korea expects price growth to move into the 3 percent range by the end of 2014. Import prices in January eased at their slowest pace since September 2012.

Reflecting improving consumption in a recovering economy, housing prices rose for a fifth straight month in January after the longest downward streak on record, according to data from Korea’s biggest lender.

Data on Wednesday showed that last month borrowing by Koreans from banks fell by the biggest amount since January 2013, though this was due to seasonal patterns and tax exemptions that ended last year.

Consumption is expected to maintain its upward trend as businesses plan to increase hiring this year. In January, the number of employed people stood at its highest since March 2002, government data showed earlier in the day.

Separate data out earlier this week showed that sales at Korea’s top department and discount store chains surged in January over a year earlier, cementing hopes for a sustained recovery.

Reuters