BOK leaves rate unchanged

As markets expected, the Bank of Korea kept its key interest rate at the historic low of 1.75 percent for the second consecutive month.

The monetary policy committee’s decision Friday comes at a time of growing concern over rising household debt and worsening exports due to a relatively sharp depreciation of the euro and yen.

The central bank governor said the monetary policy committee decided to keep the key interest rate at its current level because positive signs are starting to appear.

The decision, however, was not unanimous.

“There are positive signals showing the economy is improving, such as the recovery of the asset market and better consumer sentiment,” said BOK Gov. Lee Ju-yeol. “We need to see if this continues and spreads into the real economy.

“It would be the correct conclusion to sum up Korea’s economic situation as having a weak recovery amid sluggish overseas demand. When we released our revised outlook in April, we foresaw the economic recovery picking up after the second quarter, and after monitoring we have found that the actual situation is going in that direction. It is clear the positive signals of a recovery are there.”

Lee and the nation’s top economic policymaker, Finance Minister Choi Kyung-hwan, have repeatedly stressed that the economy has been showing signs of improvement, so there is no need for a further rate cut.

Choi said the economy in the second quarter might even grow more than 1 percent.

“As we enter the second quarter, the economic recovery mainly centered on the asset market will be spilling over to the real economy,” said Choi.

In a survey of 106 market experts, including bond traders, by the Korea Financial Investment Association released Thursday, 93.4 percent thought the central bank would maintain the interest rate.

This is a turnaround from April, when several experts speculated about a rate cut this month.

“The Bank of Korea’s May monetary policy committee meeting was largely uneventful, with the committee standing pat on rates for another month, albeit with one lone wolf continuing to call for a cut,” said Richard Iley, an economist with BNP Paribas, in a statement released after the BOK’s announcement. The economist said the policy statement by the BOK was “rather limited,” but he noticed a modest change in the governor’s comment on household debt and stood by an earlier projection of another rate cut in the near future.

“Governor Lee’s press conference predictably stressed the traditional bugbear of elevated household debt as a reason to maintain policy rates. Ultimately, the BOK remains under pressure to ease further,” he said. “Its forecasts of serial output gaps and inflation undershoots are in effect an abdication of responsibility that will ensure its credibility continues to ebb. The consumer price index’s expected fall to 0.1 percent year-on-year next month will turn the screw further.”

One of the biggest reasons keeping the central bank from another rate cut was ever-growing household debt.

“In making our monetary policy decisions, undoubtedly the most important factor is financial stability, which is even stipulated under law,” said Lee. “The question is whether the level [of debt] is something we could deal with or not and at this point it is manageable. [However,] household debt recently has been growing at an alarming rate.”

On Thursday, the BOK reported that an additional 8 trillion won ($7.4 billion) of household debt had been taken out in April, the largest ever for one month. Household debt from banks amounts to 579.1 trillion won. The previous record was in October, when 6.9 trillion won worth of fresh debt was borrowed.

Fast-growing household debt was sparked by the government’s easing of regulations on borrowing for property late last year, as well as interest rate cuts made August 2014 and March.

The export market has been struggling recently due to the weaker yen and euro, which undermine Korean competitiveness.

The International Monetary Fund on Wednesday released a disappointing report lowering its forecast for Korea’s economic growth this year. The IMF projected economic growth will reach 3.1 percent, a drop from the 3.3 percent it suggested in April. In October the IMF predicted 4 percent growth and changed it to 3.7 percent in February.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]