The Bank of Korea on the 26th held a regular meeting of the the Bank of Korea's monetary policy committee and kept the benchmark rate unchanged at 2.5% per year. It has maintained the rate at the same level for six consecutive times since July last year. The decision was unanimous by all seven members of the board, including Governor Rhee Chang-yong.
In its statement on the direction of currency policy, the Monetary Policy Board said, "As inflation remains stable near the target level and growth is expected to improve more than anticipated, risks on the financial stability front also persist," adding, "It is appropriate to maintain the current level of the policy rate while reviewing domestic and external policy conditions."
It added, "Going forward, monetary policy will support the recovery in growth, while decisions will be made after closely reviewing changes in domestic and external policy conditions, the resulting inflation trend, and financial stability."
◇ Frozen amid won-dollar exchange rate jitters… home prices still rising
The Bank of Korea (BOK) pointed to recent instability in the won-dollar exchange rate as a reason for holding rates steady. The won-dollar rate fell to the 1,420-won range at the end of last month, then surged to the 1,470-won range early this month, and has now retreated back to the 1,420-won range, indicating heightened volatility.
If the Bank of Korea (BOK) cuts rates, the rate gap with the United States could widen further. The current U.S. policy rate stands at 3.5% to 3.75% per year. A wider rate gap can prompt foreign funds to move to the United States in pursuit of higher revenue, which could deepen the won's weakness.
Rising home prices are also cited as a reason for the hold. According to the Korea Real Estate Board (REB), apartment sale prices in Seoul rose 1.07% in the previous month from a month earlier, the highest increase since October last year (1.43%), when transactions surged ahead of the Oct. 15 real estate measures. In this situation, lowering rates could drive liquidity into the property market through falling loan rates, some worry.
Concerns about an economic slowdown, cited as grounds for rate cuts, appear to be easing somewhat. With strong exports on the back of the semiconductor supercycle, the business sentiment index this month came in at 94.2, up 0.2 points from last month. The consumer sentiment index rose 1.3 points from January to 112.1, improving for a second straight month.
Cho Yong-gu, a researcher at Shinyoung Securities, said, "As the economy shows signs of recovery thanks to strong exports driven by the semiconductor supercycle and resilient consumption, the need for rate cuts has weakened," adding, "Meanwhile, the overheated property market and a weak won are persisting, so the rate-hold phase is likely to continue for quite some time."