Bank of Korea governor: “Rate held steady with FX in mind”... hints easing cycle may be over [Wrap-up]

Reference to 'rate cuts' removed from policy statement

The Bank of Korea’s Monetary Policy Board (MPB) on the 15th left the benchmark rate unchanged at 2.50% per annum and removed language related to “rate cuts” from its statement.

In the monetary policy decision statement released after the meeting, the MPB said of the policy outlook: “We will continue to support the recovery in growth, while making decisions by closely monitoring changes in domestic and external policy conditions and the resulting inflation trajectory, as well as financial stability conditions.”

Previously, since October last year, the MPB had consistently included wording to the effect that it would “maintain a rate-cutting stance while monitoring changes in domestic and external policy conditions, inflation trends, and financial stability conditions, and decide on the timing and pace of additional cuts.”

This time, however, the word “cuts” was removed—prompting interpretations that the policy center of gravity has shifted from “further easing” to “holding steady.”

At a press briefing after the meeting, Governor Rhee said of the rationale for keeping rates unchanged: “It is an undeniable fact that the exchange rate was an important reason for the decision.”

Rhee noted, “The exchange rate fell by more than 40 won from the end of last year, but has risen again this year to the mid-to-high 1,400 won range, so we need to remain quite vigilant.”

He assessed the year-to-date rise in the exchange rate as follows: “About three-quarters was due to dollar strength, yen weakness, and geopolitical risks,” adding, “The remaining quarter was due to factors specific to us (supply and demand).”

Rhee dismissed calls from some quarters to raise the benchmark rate to push the exchange rate lower. “Just six months ago, people said we missed the timing by not cutting rates, and now they say this happened because we didn’t raise rates when the exchange rate jumped,” he said. “The BOK does not set interest-rate policy based on the exchange rate. Instead, we look at the exchange rate’s impact on inflation.”

He also repeatedly drew a line under concerns about a financial crisis stemming from a weak won. “Because Korea is a net external creditor, a rise in the exchange rate does not mean the kind of financial crisis we saw in the past,” he said. “It is different from past situations where companies collapsed and defaulted because they could not repay large foreign-currency debts.”

He added, “Korea is now flush with dollars,” pointing to the issue of market participants “not selling dollars in the spot market in anticipation of further FX gains, and only lending them out.”

On the impact of holding rates steady on the property market, Rhee said, “I don’t think this alone will fully rein in the real-estate market,” adding, “A comprehensive set of government policies is needed.”

He continued, “In the Seoul metropolitan housing market, Seoul’s price growth is running at a high level, with an annualized rate approaching 10%,” and added, “We need to be mindful of the impact the metropolitan housing market has on household debt.”

Lee Seul-gi, Hankyung.com reporter seulkee@hankyung.com