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South Korea's central bank on Friday froze its policy rate at a record low for the third consecutive month, but expectations emerged for further cuts due to the fastest fall in exports, which account for about half of the export-driven economy.
Bank of Korea (BOK) Governor Lee Ju-yeol and six other policy board members decided to keep the benchmark 7-day repurchase rate on hold at an all-time low of 1.5 percent. The bank lowered the rate by 25 basis points in March and June each, after cutting it by the same extent in August and October last year.
The rate freeze was in line with market estimates. According to a Korea Financial Investment Association survey of 115 fixed- income experts, 95.7 percent of respondents predicted the rate on hold.
Such estimates were based on recovery in private consumption, which suffered from the outbreak of Middle East Respiratory Syndrome (MERS) in June and July.
Passenger car sales surged 14.9 percent in August from a year earlier, after gaining 3.5 percent in the prior month. Sales of gasoline and diesel increased 6.2 percent last month, up from a 0. 7 percent rise in July. Credit card usage soared 10.3 percent in August.
Fiscal stimulus package, including supplementary budget, was launched for the second half, preventing the central bank from cutting the borrowing costs further in a bid to wait and see the effect of monetary and fiscal stimulus.
The already massive household debts increased sharply amid the record-low interest rates, serving as risk factors to the BOK's more accommodative monetary policy.
Debts owed by households to banks and non-bank deposit takers posted the third-largest monthly growth in July. The biggest increase was tallied in June, with the second-largest coming in April. The BOK lowered the policy rate in March and June respectively.
The expected interest rate hike in the United States also discouraged the BOK from altering its policy rate as the U.S. rate increase may lead to an abrupt foreign capital outflow from the local financial market.
Market watchers predicted the U.S. Federal Reserve raising the interest rate within this year for the first time since the 2008 global financial crisis.
Despite the fast-growing household debts, expectations emerged for additional rate cuts as the country's exports tumbled 14.7 percent in August from a year earlier, marking the fastest decline in six years.
The finance ministry said in its monthly economic report Green Book that manufacturing activity weakened due to sluggish exports although consumption, investment and employment increased recently.
The expected rate hike in the United States and economic slowdown in China, South Korea's largest trade partner, were picked as risk factors to the South Korean economy. South Korea's exports to China declined 8.8 percent last month, contributing to the dampening of the country's overall exports.
Morgan Stanley projected the BOK to cut rates as early as in October, and Barclays predicted another rate cut in the fourth quarter.
Nomura International forecast that the bank would lowered the benchmark interest rate by 25 basis points in October this year and March next year respectively to 1 percent.
