Bank of Korea keeps rates on hold as political uncertainty churns

A shock win by Donald Trump in the US presidential election earlier this week poses long-term risks the Bank of Korea (BOK) will need to monitor carefully.

By: Reuters | Seoul | Published:November 11, 2016 10:17 am
Donald Trump, Trump South Korea, Park Geun-hye, US South Korea, news, latest news, world news, international news, US news, South Korea news File Photo: South Korean President Park Geun-hye in Seoul March 1, 2016. (Source: REUTERS/Jung Yeon-Je/Pool/File Photo)

South Korea’s central bank stayed its hand for a fifth straight month on Friday, as widely anticipated, amid an upswell of global uncertainty and a political scandal involving President Park Geun-hye that may mean trouble ahead for the economy. A shock win by Donald Trump in the US presidential election earlier this week poses long-term risks the Bank of Korea (BOK) will need to monitor carefully.

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Its governor, Lee Ju-yeol, stressed the bank needs more time to assess what policies were likely once Trump took office, although he saw the US Federal Reserve as likely to stay on course to hike rates in December. “If Trump’s campaign promises are turned into policy they will hurt trade,” Lee said, although he noted that not all Trump’s promises were “bad”.

Lee brushed aside talk of potential capital flight, saying rising bond yields and bond outflows in October had partly been due to book-closing towards the end of the year. All but one of 27 analysts polled by Reuters had forecast the central bank would keep its reference 7-day repurchase agreement rate on hold, with one dissenter seeing a cut.

Lee kept the door open to possible further easing, saying the bank still has room to move, although current monetary policy is accommodative. There was also little need to raise interest rates just because the won was weakening, he said.

“Given growing uncertainties, the bank may start to talk about rate reductions only early next year,” Park Hyuk-soo, a fixed-income analyst at Daishin Economic Research Institute said after the governor’s news conference ended.

Park said the bank’s assessment of the economy seemed to be worsening, noting that the BOK said in a statement on Friday that domestic demand seems to have deteriorated. South Korea’s economy, Asia’s fourth-largest, is on course for a recovery, but there are headwinds. Ongoing restructuring of the country’s shipping and shipbuilding industries, for example, is expected to result in severe job losses.

Trump’s policies have fed fears of a surge in global trade protectionism, which would likely hit major Korean exporters such as Samsung Electronics Co Ltd and Hyundai Motor Co particularly hard. This would lend a further blow to already-battered exports, struggling to recover after falling for most of the past two years as global demand waned.

Like Park, a slim majority of analysts polled by Reuters see another rate cut in early 2017, but some acknowledge further easing alone may not solve the sluggish growth problem. “We reiterate our view that the BOK still has space to deliver a 25 basis point rate cut in Q1 2017,” ANZ economists said in a note. “(But) unless more structural reforms are enacted, we acknowledge that the marginal effect of a rate cut will continue to decline.”