south Korea freezes policy rate to wait and see effect of June cut

South Korea's central bank on Thursday froze its policy rate at a record low in a bid to wait and see the effect from a quarter-percentage-point cut in borrowing costs in June.

Bank of Korea (BOK) Governor Lee Ju-yeol and six other policy board members decided to keep the benchmark seven-day repurchase rate on hold at an all-time low of 1.25 percent.

It was in line with market consensus as experts predicted a rate on hold for the expected wait-and-see stance by the BOK following the June rate cut as well as the continued increase in household debts.

According to a Korea Financial Investment Association (KFIA) survey of 200 fixed-income experts, 96 percent of the respondents had predicted a rate freeze this month.

The BOK refrained from altering the rate as the already massive household debts keep rising. Outstanding household debts by banks increased 6.3 trillion won (5.7 billion U.S. dollars) in July from a month earlier.

Mortgage loans, which account for more than two-thirds of household debts, expanded 5.8 trillion won last month. Home-backed loans topped 500 trillion won in June for the first time amid the record-low borrowing costs.

Despite concerns about surging debts, expectations mount for the BOK to lower its policy rate further in and around October due to dismal outlook for the economy.

Kwon Young-sun, a Hong Kong-based economist at Nomura International, forecast a BOK rate cut by 25 basis points in October based on his expectation for a sharp fall in South Korea's gross domestic product (GDP) in the third quarter.

The country's real GDP grew 0.7 percent in the April-June period compared with the previous three-month period, staying below 1 percent for three straight quarters.

Seoul's finance ministry submitted an 11 trillion-won supplementary budget plan to the National Assembly, but the passage has been delayed amid bickering over whether to deploy Terminal High Altitude Area Defense (THAAD) in South Korean soil.

The ruling Saenuri Party calls for the THAAD deployment by the end of next year as planned, while opposition lawmakers demanded a sincere review over whether the installation is in national interests.

Market watchers expected the extra budget plan to be passed through the parliament by the end of this month and to be implemented from next month, casting a cloud over the third-quarter growth forecast.

The THAAD deployment, which will weaken economic ties between China and South Korea, is forecast to weigh down on the already sagging South Korean exports.

The export-driven economy's overseas shipments declined 10.2 percent in July from a year earlier, marking the longest monthly fall in history for the 19th consecutive month.

South Korean exports to China, the world's second-largest economy, slumped 9.3 percent over the year in July. China takes up about a quarter of South Korea's total overseas shipments.

Outlook for South Korea's exports recovery gets abysmal as the local currency continued to appreciate to the U.S. dollar. The won/dollar exchange rate settled at 1,095.4 won per dollar in Seoul trading on Wednesday, falling below the 1,100-won level for the first time in 13 months. It was a sharp drop in the rate, which peaked at 1,245 won in February.

Caused by sluggish exports, the employment among manufacturers, the country's main export engine, reduced 65,000 in July from a year earlier. It marked the first decline in 49 months since June 2012.

The ongoing restructuring in the shipbuilding and shipping industries led the jobless rate in the southeastern region, where major shipyards and ports are sited, to rise further.

Source : XINHUA