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BOK stays pat, revises down inflation target to indicate slower rate move

2018.04.12 13:11:32 | 2018.04.12 16:41:33
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BOK governor Lee Ju-yeol

BOK governor Lee Ju-yeol

The Bank of Korea (BOK) on Thursday kept the policy rate steady at 1.50 percent and indicated subdued inflation and growing uncertainties from the clashes of the world’s two largest economies could slow additional hike moves.

The central bank suggested that its policy decision would be guided by inflation movement more than the U.S. rate actions and household debt increases after revising down this year’s forecast for consumer prices to annualized gain of 1.6 percent from 1.7 percent estimated in January. It kept its estimate for economic growth unchanged at 3.0 percent.

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“The last (25-basis-point) hike (in November) has helped slow the growth pace in household debt. It won’t likely build up to a risk for the financial system,” said governor Lee Ju-yeol after presiding his first monetary policy meeting upon gaining a second three-year term at the beginning of this month.

“But we may have to consider preemptive actions as growth in household debt is greater than income growth,” he added.

Still, the downward revision in inflation estimate suggests the central bank may put off the next hike to the second half as consumer prices are unlikely to suddenly pick up before May when the bank holds the last rate meeting for the first half.

Betting on milder tightening - just one at best in the second half - has sent bond prices higher. The three-year government yield fell 0.9 basis points to 2.156 percent and the five-year bond yield 1.2 basis points to 2.379 percent.

Kospi closed Thursday down 0.06 percent at 2,442.71.

The consumer price index gained 1.3 percent on average in the first three months despite sharp gains in food prices. Worsening job data also weighs on any policy action that can weaken the demand. Unemployment rate in March showed the highest figure for the month since data has been followed under modernized standards in 2001.

Although the U.S. Federal Reserve’s latest hike to 1.50-1.75 percent puts the Korean central bank in a bind as higher U.S. interest returns could draw capital out of Korean assets, the BOK cannot match the gains in the U.S. where employment is near-perfect and inflation pressuring is building up because of tax cuts and faster economic recovery.

On the strengthening of the Korean won after Washington announced it was in negotiation with Seoul to ensure more transparency in currency policy, Lee said disclosure of foreign exchange transactions by the Korean authorities is unlikely to greatly influence the movement in the won. His comment helped the won fall 3.2 to 1,069.5 against the U.S. dollar.

“The currency policy is basically decided by supply and demand,” he said, while reiterating that “smoothing operations” will continue against heavy volatility.

By Kim In-oh and Choi Mira

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]

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