SEOUL, Feb. 14 (Xinhua) -- Bank of Korea (BOK), South Korea's central bank, on Thursday kept interest rates on hold at 2.75 percent on better economic conditions after the South Korean won fell against the U.S. dollar.
Governor Kim Choong-soo and the monetary policy board members decided to leave the seven-day repurchase rate unchanged at 2.75 percent at the February rate-setting meeting. The decision was not unanimous.
The BOK resumed its monetary easing cycle last year by reducing borrowing costs by 25 basis points in July and October each, before maintaining a wait-and-see stance for four straight months.
"I think the monetary policy stance is now expansionary, rather than tightening," though the BOK froze the base rate, Kim told reporters. "The rate cut alone does not necessarily mean a monetary easing."
Kim noted that there remained external uncertainties such as the fiscal problems in advanced economies and the issue of foreign exchange rates.
The February decision was in line with market consensus as most experts predicted the rate freeze on improved economic conditions after the local currency reversed its appreciating trend versus the greenback recently.
The South Korean currency turned to depreciating trend after months of steady gains. The won/dollar exchange rate hovered at a range of between 1,080 and 1,090 after falling to as low as 1,050 in early January.
The currency was expected to sustain its upward momentum over the long run amid continued current account surplus and foreign capital inflows, but the won's appreciation would slow due to the expected policy response to arrest abrupt capital flows in and out of the country. Deputy Finance Minister Choi Jong-ku said on Jan. 30 that the government was weighing taxes on bonds and currency trading to limit speculative inflow of foreign capital.
The correlation between interest rates and foreign exchange rates was assessed to decrease, reducing burden for the BOK to cut interest rates to devalue the won. Historically, the rate cut tended to appreciate the won to the dollar as lower rates induced foreign capital inflow into stocks and bonds in the country.
"Lower interest rates in Korea could cause capital to flow in, rather than out, pressuring the won to appreciate, rather than depreciate," Yoon Yeo-sam, a Seoul-based fixed-income analyst at KDB Daewoo Securities, said in a Feb. 5 report.
The yen's depreciation eased after Japanese Finance Minister Taro Aso admitted the fast speed of the yen's recent slide. Since September, the yen has dropped more than 17 percent against the dollar, while the won has gained 3.5 percent versus the greenback.
The BOK worried about the weak yen from Japan's expansionary policy. "In terms of future growth path, there are some potential uncertainties related to fiscal tightening in advanced countries and to the new Japanese government's expansionary policy operations," the BOK said in a statement.
South Korea's economic conditions were enhanced as seen in the recently-released economic indicators. Exports, which account for more than half of the economy, rose 11.8 percent in January from a year before after falling 5.7 percent in the prior month.
The faster growth was attributed to more business days from the Lunar New Year's holiday that fell in January last year and in February this year, but market watchers expected the exports to show a rosy picture amid improving economic fundamentals in the U. S., stabilizing financial markets in Europe and hopes for Japan's growth from the new stimulus.
BOK Governor Kim mentioned South Korean exporters' non-price competitiveness, saying that the won's ascent will have a limited influence on the economy compared with the past. Export growth would lead to a rise in import of capital goods and its concomitant capital spending increase.
Retail sales fell in December from a year ago, but confidence among South Korean consumers rose to an 8-month high of 102 in January, indicating that consumers are increasingly confident about the economy.