Bank of Korea holds rates as inflation trails target, trade fears remain

By Cynthia Kim and Christine Kim

SEOUL (Reuters) – The Bank of Korea held interest rates steady for a sixth straight month on Thursday, with inflation seen remaining below target and trade frictions between the United States and China raising fears of collateral damage to other export-reliant Asian economies.

The Bank of Korea’s monetary policy committee held its base rate steady at 1.5 percent, in line with forecasts from 13 analysts surveyed in a Reuters poll.

Market players took Thursday’s decision in stride. The Korean won was up 0.1 percent as of 0105 GMT versus its previous close, while June contract on 3-year treasury bond futures increased by 0.07 points 107.83.

A majority of analysts see the central bank raising its benchmark rate in July, which they believe would be the only increase this year. There is no monetary policy meeting scheduled for June.

Moon Hong-chul, an economist at Dongbu Financial Investment said there may have been a dissenting vote at Thursday’s meeting.

“The BOK will look for opportunities to raise interest rates to stay aligned with policy tightening in the U.S., to reduce interest rate differential. As such, there could be a dissenter at Thursday’s meeting, even though it’s a hold,” Moon said.

Any dissenting votes will be announced by Governor Lee Ju-yeol at the start of his news conference later in the day.

South Korean policymakers are increasingly concerned about the collateral damage to Korea’s own exports from the Sino-U.S. trade dispute. A fall in China’s exports to the United States would hurt Korean shipments to China, including large volumes of intermediary goods used in China to make products for export.

The United States and China are currently in talks to resolve trade issues after President Donald Trump threatened to impose tariffs on up to $150 billion worth of imports from China, prompting Beijing to retaliate.

At home, inflation has been trailing the central bank’s 2 percent target since last October, further dimming the prospects for interest rate increases in the coming months.

In April, the bank trimmed its 2018 inflation outlook to 1.6 percent from 1.7 percent previously, but remained positive about the underpinnings of Korean growth.

The economy remains on track to grow 3 percent this year but Governor Lee Ju-yeol said last week difficult local job market conditions and escalating U.S.-China trade friction cloud South Korea’s growth outlook.

Thursday’s interest rate decision was the first for new board member Lim Ji-won, formerly of JP Morgan, who joined the seven-member committee on May 17 for her four-year term.

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