Korean Economy News
Bank of Korea holds rate steady despite mounting pressures for rate cut

Lee Ha-yeon

The Bank of Korea (BOK) on Friday left its policy rate unchanged despite heavy market bet on a rate cut amid growing pessimism about the economy from the expanding global trade war.

The central bank kept the base rate steady at 1.75 percent, as widely expected. It is a level maintained since November last year when the rate went up 25 basis points for the first time in a year.

The inaction is in line with the U.S. Federal Reserve, which decided to keep the rates unchanged in a range between 2.25 percent and 2.5 percent early this month. The Fed hinted no more increases for this year, saying the current patient approach would last for some time.

BOK Governor Lee Ju-yeol last month said the option of a rate cut was not on the table, but whether he can keep to his stand will be closely watched as the market has been betting heavily on a rate cut in near future.

The bond market has been rallying after the Korean economy performed its worst in a decade in the first quarter, falling 0.3 percent from the previous quarter. On Thursday, the three-year government bond yield closed at 1.626 percent and the 10-year bond yield at 1.741 percent, on par with the overnight policy rate.

The International Monetary Fund and the Organization for Economic Cooperation and Development (OECD) have been advising monetary easing on top of more aggressive fiscal expansion to prop up the economy after they downgraded their growth estimates for Korea this year.

The trade-reliant country saw its outbound shipments fall for five consecutive months in April to $48.9 billion, down 2 percent from a year earlier, amid plummeting memory chip prices and weak demand from its largest trading partner China. The fall is expected to steeply deepen by double digits in May as Korea’s exports totaled $25.7 billion in the first 20 days, down 11.7 percent on year.

The country’s headline inflation last month gained 0.6 percent on year but hovered below the 1.0 percent level for the fourth consecutive month. It added a mere 0.5 percent in the first four months this year, the smallest since inflation data was compiled in 1965.

The next policy meeting is scheduled for July 18.

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