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South Korea's central bank decided on Thursday to keep the benchmark interest rate after cutting it to an all-time low in March, on worries about surging household debts and the potential foreign capital exodus.
Bank of Korea (BOK) Governor Lee Ju-yeol and six other policy board members decided to keep the seven-day repurchase rate on hold at 1.75 percent. The policymakers cut the policy rate below 2 percent last month for the first time in the country's history.
The decision was not made unanimously, boosting expectations for further rate cuts. One policymaker opposed to the rate freeze in favor of a further rate cut.
The one-member opposition indicated the BOK's additional rate cut as the bank tended to lower borrowing costs one or two months after the dissent was offered.
The rate freeze was in line with market consensus. According to the Korea Financial Investment Association (KFIA) survey, 96.4 percent of fixed-income experts had expected the rate freeze this month.
Market watchers predicted the rate freeze on concerns about surging mortgage loans and possible foreign fund outflow away from the country.
Mortgage loans increased rapidly amid record-low interest rates. As of end-March, home-backed loans extended by banks amounted to 418.4 trillion won (383 billion U.S. dollars), up 4.8 trillion won from a month earlier.
For the first three months of 2015, bank mortgage loans surged 11.6 trillion won, nearly nine times the 1.3 trillion won increase during the first quarter of 2014.
The BOK lowered its policy rate by a quarter percentage point in August and October last year and in March this year each, contributing mainly to a surge in the already-massive household loans.
"Monetary policy is basically macroeconomic policy, which puts priority on growth and inflation. Though financial stability is not ignored, priority is placed on macroeconomic conditions rather than household debts," Lee told a press conference after the rate- setting meeting.
The central bank revised down its 2015 growth outlook for the economy by 0.3 percentage points to 3.1 percent, while downgrading its 2015 headline inflation outlook by 1 percentage point to 0.9 percent.
The downward revision reflected the expected deficiency in tax revenue this year, though not so much as last year, Lee said, noting that the fourth-quarter GDP growth stood merely at 0.3 percent on a quarterly basis on the back of the tax revenue shortage.
The country's first-quarter growth was sluggish, but the economy is expected to recover the growth rate to meet its potential, the governor said.
Worries mounted over the possible foreign capital flow out of the country. The U.S. Federal Reserve is forecast to end its zero- rate policy within this year, which can trigger foreign fund exodus from South Korea to look for high-yield assets.
Recent economic data showed an upbeat picture, leading the BOK to refrain from altering the rate. Production in mining and manufacturing industries expanded 2.6 percent in February from a month earlier due to a rebound in auto production and the continued rise in chip output.
The March industrial activity was expected to maintain a recovery trend amid positive effects from the launches of new IT and car models, but oil refiners would enter the period of regular maintenance, which could limit recovery in industrial activity.
Retail sales rose 2.8 percent in February on a monthly basis due to demand for semi-durables and non-durables. Sales in department stores and discount outlets reduced in March, but sales in cars and via online shopping malls increased last month.
Consumer price inflation declined to 0.4 percent in March, the lowest since July 1999 when consumer prices rose 0.3 percent on a yearly basis. The headline inflation kept a zero-percent increase for four months in a row.
Trade surplus reached a record monthly high of 8.39 billion U.S. dollars in March, but it came as imports reduced at a faster pace than exports.
The U.S. recovery was pausing on strong dollar and cold weather, but the euro zone economy was on a recovery track due to the European Central Bank's (ECB) quantitative easing and the subsequent weakness of the euro, the Finance Ministry said in its monthly economic assessment report.
The ministry said there remained external uncertainties such as the possible rate hike in the United States and the weak Japanese yen, but it noted that positive factors emerged like lower oil prices and asset price rises. Enditem
