No surprise as BOK lets key rate stay at 2 percent

Korea kept its key interest rate unchanged at a record low for a fourth month as policy makers express optimism and modest growth and inflation.

The Bank of Korea held the seven-day repurchase rate at 2 percent, as forecast by economists. It lowered the rate by 50 basis points through two cuts in 2014.

The BOK is holding firm for the time being, even as more than a dozen central banks from China to Australia have eased monetary policy this year to bolster growth and support price gains.

The current interest rate doesn’t restrain the economy, which will recover modestly, Gov. Lee Ju-yeol said Tuesday, adding that he still sees the nation reaching economic forecasts made last month.

“The Bank of Korea is taking its time, but it will cut the interest rate,” Yoon Yeo-sam, a fixed-income analyst at Daewoo Securities, said after the decision. “It will be hard for the bank to keep the rosy stance on recovery as growth in the first quarter won’t be that strong.”

Economists including Yoon forecast a cut in April, while others see a reduction coming as soon as next month.

The sharp increase in household debt was considered when the bank decided to keep rates on hold Tuesday, Lee said after the decision.

Mortgages and other lending to households is continuing to rise “at a level greatly exceeding that of recent years,” the bank said in a statement.

The output gap, where actual production demand is lower than potential supply in the economy, will continue for a “considerable time,” and inflation will stay at a low level and then gradually rise in the second half of this year, the bank said in a statement.

Korea’s central bank rarely changes its key interest rate before the Lunar New Year holiday, when its financial markets close, said Raymond Yeung and Louis Lam, Hong Kong-based economists for Australia & New Zealand Banking Group Ltd.

The holiday runs from Wednesday to Friday this week.

“We believe the BOK wants to buy time and save bullets for future actions,” Yeung and Lam wrote report last Thursday.

The BOK lowered its growth outlook from 3.9 percent to 3.4 percent, while reducing its inflation forecasts to 1.9 percent from 2.4 percent.

Bloomberg