Key interest rate remains at 1.5%

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Key interest rate remains at 1.5%

The Bank of Korea (BOK) on Thursday kept the benchmark interest rate at 1.5 percent for the sixth consecutive month, as it keeps a wary eye on the impending U.S. rate hike which is expected next week.

As market observers expected, the central bank froze its key rate at the same record-low level it has held since 2009, based on its judgment that a U.S. rate hike, the first in nearly a decade, could prompt a rapid outflow of foreign capital from the Korean market and other emerging countries.

BOK Governor Lee Ju-yeol said the U.S. is highly likely to raise its rate by the end of the year, but its impact on the Korean market will be limited.

“It has long been anticipated that the U.S. Federal Reserve is going to lift its rate,” Lee said at a press briefing. “Since the pace of the rate hike is expected to be gradual, we believe the impact on the financial market will be limited.” he said.

The monetary policy committee made a unanimous decision to freeze the key rate, he added.

The U.S. Fed’s Market Committee is scheduled to hold its rate-setting meeting on Dec. 15 and 16.

Lee dismissed the possibility of the BOK raising the key rate immediately after a U.S. rate hike. “A rate hike by the U.S. Fed will not directly lead the BOK to adjust its rate upward,” he said. “Our base rate already reflects the expected rate increase, and we have enough time to respond to it.”

“The BOK’s decision will be based on all global factors, not only the U.S. rate hike itself but also movements and changing conditions in the global financial market and economy,” he added.

The BOK chief acknowledged the U.S. rate hike could have an impact on the local market if it causes problems in fragile emerging markets.

“The biggest concern is that emerging countries that are financially vulnerable could possibly fall into a financial crisis and its fallout could spill into other countries,” Lee said.

The central bank has contingency measures to deal with the possible negative results, including keeping market liquidity at a high level.

“Considering Korea’s strong economic fundamentals and large current account surplus, the impact of the U.S. rate hike such as capital outflow won’t be significant,” the governor said.

As for the domestic economy, the BOK chief said the country’s economy will continue with the current recovery path, although external uncertainties stemming from the Chinese economic slowdown remain high.

According to data by the central bank, the country’s GDP expanded 1.3 percent in the third quarter compared to the previous quarter, largely owing to increased domestic consumption helped by the record-low interest rate. The quarterly growth marked the sharpest gain in five years,

But exports have been falling for the 11th consecutive month until last month. Exports in November slid 4.7 percent year-on-year. In October alone, exports plunged 15.8 percent year-on-year, the fastest rate in six years.

The BOK governor said the country’s exports were expected to continue declining for some time, due to the low global oil prices and the global economic downturn.

“Global recovery is slower than thought,” he said.


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