South Korea's central bank on Thursday kept its benchmark interest rate on hold at 2.5 percent for July amid lingering concerns over an early end of U.S. quantitative easing.
Bank of Korea (BOK) Governor Kim Choong-soo and monetary policy board members decided unanimously to freeze the benchmark seven- day repurchase rate at 2.5 percent after lowering the rate two months earlier. The seven-member committee cut borrowing costs by 25 basis points in July and October last year.
The decision was in line with market consensus as experts predicted the rate freeze amid remaining worries that U.S. Federal Reserve would scale back 85 billion U.S. dollars in its monthly bond purchases earlier than market watchers had expected. " Uncertainties over the possibility of an earlier-than-expected tapering of U.S. quantitative easing, a slowdown in Chinese economic growth and the implementations of fiscal consolidation in major countries remain as downside risks to growth,"the BOK said in a statement following the July monetary policy meeting.
The U.S. economy created 195,000 jobs in June, beating analysts' estimates. The better-than-expected jobs report raised speculation over the possible start of reduction in the bond purchases from September.
According to the June 18-19 FOMC minutes unveiled overnight, around half of FOMC members favored the early exit from quantitative easing. "Reduction in quantitative easing is being viewed as a liquidity shortage. Despite the QE reduction, overall stock of liquidity will grow as the bond purchases continue," Governor Kim told reporters.
Kim noted that the expected exit in the U.S. quantitative easing would not be "a surprisingly aggressive change," forecasting that highly accommodative monetary policy would last in the U.S.
Fed Chairman Ben Bernanke tried to quell jitters over the early U.S. exit. Bernanke said in a speech overnight that highly accommodative monetary policy for the foreseeable future is "what 's needed in the U.S. economy.
According to the FOMC minutes, many U.S. policymakers still favored the termination of the bond purchasing program after confirming improvement in the labor markets.
Touching on the global growth outlook, Governor Kim said the U. S. economy was on a recovery path given the positive employment data, noting that the European economy was showing signs of going into better shape.
Reflecting the upbeat global outlook, the central bank revised up its growth outlook for 2013 from 2.6 percent to 2.8 percent as expected. The growth outlook for 2014 was set at 4 percent.
Kim cited the prior policy rate cut, fiscal stimulus package and the global recovery as factors that drove the bank to upgrade its growth forecast. "If the U.S. market coughs, emerging markets will likely catch colds,"Yoon Yeo-sam, a fixed-income analyst at KDB Daewoo Securities, said before the rate decision.
Yoon noted that an early rollback of quantitative easing in the U.S. should dampen sentiment for U.S. equities, saying that it was too early to determine whether the U.S. economy was firmly back on track.