South Korea freezes interest rate at record low amid expectations for rate cut

GMT 04:25 2016 Tuesday ,19 April

Arab Today, arab today South Korea freezes interest rate at record low amid expectations for rate cut

South Korea's central bank
Seoul - XINHUA

South Korea's central bank on Tuesday froze its benchmark interest rate at a record low for 10 straight months amid rising expectations for further rate cut caused by sluggish exports and lackluster private consumption.

Bank of Korea (BOK) Governor Lee Ju-yeol and six other policy board members decided to keep the benchmark seven-day repurchase rate at an all-time low of 1.5 percent. One of the monetary policymakers cast a dissenting vote for three straight months in favor of a rate cut.

Among the seven policymakers, four seats will be replaced by new board members who will join the rate-setting meeting from next month.

The April decision was in line with market expectations. According to a Korea Financial Investment Association survey of 200 fixed-income experts, more than 80 percent predicted a rate freeze.

The BOK said in a statement that though export fall continued, domestic demand and sentiment among consumers and businesses improved more or less, explaining the reason of rate freeze decision.

The bank, however, opened a door for more accommodative monetary policy, saying that it will manage its monetary policy in a direction to support growth recovery going forward.

Many of market experts forecast the BOK would cut rates at least once within this year, citing pessimistic economic indicators and the ruling Saenuri Party's defeat in parliamentary election.

South Korea's exports, which account for about half of the export-driven economy, tumbled 18.9 percent in January on a yearly basis, followed by drops of 12.2 percent in February and 8.2 percent in March each.

For the first 10 days of April, the country's overseas shipments plunged 24.7 percent compared with the same period of last year, according to customs data.

Record-breaking household debts discouraged consumers from spending money. Worsening labor market conditions also weakened private consumption.

Jobless rate for those under 30 reached 11.8 percent in March, higher than any March figures. In February, the youth unemployment rate hit a record high of 12.5 percent.

The government is widely expected to launch massive corporate restructuring especially in shipping and shipbuilding industries, which will lead to a high number of layoffs.

South Korean President Park Geun-hye's conservative party was unexpectedly defeated in the April 13 general election. It could damage the Park government's efforts to reinvigorate the economy unless opposition parties support Park's economic reform drive.

The ruling Saenuri Party won 122 parliamentary seats in the 300-member National Assembly. The main opposition Minjoo Party secured 123 seats, while the newly launched People's Party took 38 seats.

"The general election defeat of the ruling party, which claimed the Korea-version quantitative easing, will make the government take more time to implement (expansionary) fiscal and monetary policies,"said Moon Hong-Cheol, a fixed-income analyst at Dongbu Securities.

Moon predicted a BOK rate cut in May or June, saying the finance ministry will announce supplementary budget plan in the second half of this year to bolster up the faltering economy.

Nomura International's Kwon Young-Sun economist forecast the BOK would cut rates twice in July and October to 1 percent, saying it was expected for the government to unveil an extra budget in June.

Obstacles remained to more accommodative monetary policy in South Korea, where the record-breaking household debts may increase to a dangerous level amid the super-low borrowing costs.

Additional rate cuts may touch off foreign capital exodus from South Korea's financial market as the United States is widely expected to raise its super-low interest rate this year.

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