Central Bank is firm on rates prior to Fed’s move

Bank of Korea Gov. Lee Ju-yeol, left, starts the monthly monetary policy committee meeting at the central bank’s headquarters in central Seoul on Thursday. [NEWSIS]

The Korean central bank on Thursday took a cautious approach by keeping the key borrowing rate unchanged at 1.5 percent for the fifth consecutive month.

The decision matched predictions by the market, and the central bank governor made it clear there will be no additional rate cuts in the foreseeable future. He expressed confidence in an economic recovery largely fueled by increased consumer spending.

“We plan on closely monitoring capital flows, as well as overseas risk factors such as rising household debt, the U.S. Federal Reserve’s monetary policy decision and the economic situation in emerging markets including China,” Bank of Korea Gov. Lee Ju-yeol said at a press briefing held after the monthly monetary committee meeting. “The decision by the monetary policy committee [to freeze the key interest rate] was unanimous.”

The governor stressed domestic factors in the recovery of the economy. But he also had a positive outlook on exports.

“In the third quarter, consumer spending improved a lot largely thanks to the government’s policies, including the lowering of the individual consumption tax and [Korea’s] Black Friday,” the governor said. “But other contributors included improving sentiments among economic participants and increases in household real incomes, including wage increases.

“We view the situation as having recovered to levels before the MERS [Middle East respiratory syndrome] crisis. And we expect the improvement in consumer spending will continue, considering that the employment market, as well as households’ actual purchasing powers will get better.”

When asked about exports, he agreed that last month’s outbound shipments had seen a sharp drop.

“We looked into the reason [for the decline],” the governor said. “Of course, falling crude prices and the lowering of export unit prices played a significant role, but [October’s exports] also fell sharply because exports in October last year hit an all-time record.”

He said if exports fail to pick up, it would definitely act as downward pressure on the economy, which would affect the domestic market. Companies would cut or freeze wages, and hiring would be even slower.

“Because exports take up a large portion of the economy, it is true that they limit recovery of the domestic market,” Lee said. “But when consumer spending and investments improve, it gives upward pressure that will increase wages and hiring as well.”

In fact, the economy grew 1.2 percent in the third quarter compared to the previous quarter. It was the highest growth in five years. When compared to a year ago, the economy expanded 2.6 percent. Furthermore, the economy has been struggling to reach economic growth of more than 1 percent since the second quarter of 2014.

In addition to a favorable outlook on the economy, uncertainty from the U.S. Federal Reserve interest rate decision was believed to have acted as another significant factor in the Bank of Korea freezing the key interest rate this month.

It is becoming more evident that the U.S. Fed will likely raise interest rates for the first time since the 2008 global crisis, as Charles Evans, president of the Chicago Federal Reserve Bank, hinted at such a move earlier this week.

But during the press briefing, Lee stressed that the central bank will not likely lower Korea’s key borrowing rate further as suggested by several market experts, saying that the already-low interest rate has played a role in increasing the number of insolvent companies. He also warned that a hike in interest rates by the U.S. Fed could have a massive impact on companies with a lot of debt.

“Until now, we focused on revitalizing growth momentum and maintained a low-interest rate environment,” Lee said. “But now, although growth momentum is important, it is time for us to work on restructuring companies that have reached their limits.”

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