South Korea Rate Decision On Tap For Thursday

“(The Monetary Policy Committee) decided to leave the key rate at the current level, given budding signs of an economic recovery and increased market volatility”, BOK Gov. Lee Ju-yeol said in a press conference.

Authorities in Seoul are closely monitoring volatility in financial markets following the drop in the yuan, which the central bank said Thursday adds to uncertainties for Korea.

Korea’s Gross Domestic Product expanded by 0.3 percent from the first for annual growth of 2.2 percent, down from 2.5 percent in the first quarter.

Government bonds fell after the BOK held the seven-day repurchase rate at a record-low 1.5 percent on Thursday, as forecast by all 16 analysts surveyed by Bloomberg. Debt is increasing faster than incomes, with bank lending to households surpassing 600 trillion won (S$710.8 billion) last month.

The BoK was satisfied that the threat of deflation had been addressed by the rate cut in June as consumer prices held steady at 0.7 percent – although price growth remained below 1.0 percent for the eighth straight month.

China’s blitzkrieg devaluation of its currency is another concern for local industries, raising the price of Korean products sold in the world’s second-largest economy and discouraging tourists from visiting the country due to higher costs.

“The global economy will sustain its modest recovery going forward, centering around advanced economies such as the US, but judges that the possibility exists of its being affected by heightened worldwide financial market volatility due to a shift in the US Federal Reserve’s monetary policy and to the devaluation of the Chinese yuan, and by the weakening of economic growth in emerging market countries”, the bank said. It’s weakened 5 percent against the dollar since the end of June, 3.6 per cent against the Japanese yen and 1.9 per cent versus the yuan during the same period. On the employment front, the employment-to-population ratio in July maintained the same level as that during July of last year, but the trend of increase in the number of persons employed slowed and, due mainly to an expansion in job search activities, the unemployment rate rose compared to that in July last year. Mr Lee didn’t elaborate on these.

Australia will release its inflation forecast for August; in July, the outlook was for 3.4%. There have been no new infections reported since early July.

“If the yuan continues to weaken and the won stays relatively strong, it could lead to a deterioration of Korean exports”, said Mr Lee at Eugene Investment.

“I can’t say which is more important between exports or capital outflows in terms of what’s happening in China”.