Roundup: S. Korea freezes policy rate amid expectations for cuts

South Korea's central bank froze its policy rate on Thursday at a record low of 2 percent amid lingering expectations for additional rate cuts after lowering borrowing costs twice in 2014.

Bank of Korea (BOK) governor Lee Ju-yeol and six other policy board members decided unanimously to keep the benchmark seven-day repurchase rate on hold at 2 percent. The bank cut the rate by 25 basis points in August and October each.

"The current growth meets its potential. If the economy deviates from the path, (the policy rate) will be altered," Lee told reporters after the policy meeting. "Oil prices are a supply- side factor (in inflationary pressures), so it was desirable to freeze the rate."

The rate freeze is in line with market expectations as seen in the Korea Financial Investment Association's survey of 111 experts. About 96 percent of the respondents predicted the rate on hold in January 2015.

The rate-setting decision came as positive signs were detected in recent economic indicators. In December 2014, retail sales showed an upbeat picture as auto sales by local automakers surged 27.2 percent from a year earlier. Credit card usage increased 8.7 percent, with gasoline sales rising 1.6 percent.

Exports in December advanced 3.7 percent on demand for locally- made mobiles phones, steels and chips. Trade surplus was 5.78 billion U.S. dollars last month.

Sales at discount outlets and department stores reduced 3.6 percent and 0.3 percent each in December, but those were down from falls of 4.7 percent and 6.5 percent each in November.

Construction investment retreated 1.7 percent in November, but facility investment expanded 13.1 percent in the same month. Production in the mining and manufacturing industries climbed 1.3 percent in November on robust demand for cars and chips.

Cheaper oil is expected to help the economy, which depends on imports for all crude demand, reduce production costs. "Falling oil price definitely helps boost the real economy as we are a sheer oil importer," Lee said.

Despite the upbeat picture, expectations remained for another rate cut in 2015. Some market watchers expected the policy rate to be lowered to 1.5 percent within this year.

President Park Geun-hye's New Year press conference bolstered such expectations. Asked about a need for further rate cuts, Park told reporters Monday that the government will tackle the matter on "rate cuts" in a timely manner after consulting with those in charge of macroeconomic policies.

Park explained her intention later, saying she did not seek to provide a guideline on the BOK's independent rate-setting decision, but market rates dropped after the press conference.

Yields on the three-year Korea Treasury Bond (KTB) tumbled 5.0 basis points Wednesday to close at 1.974 percent. It was the first time that the yield fell below 2 percent, or the benchmark interest rate.

Low headline inflation was feared to change from disinflation to deflation, which means stagnant economy amid falling consumer prices as seen in the so-called "lost two decades" in Japan.

South Korea's consumer prices rose 0.8 percent in December from a year earlier, marking the lowest in 14 months. The headline inflation has long stayed below the BOK's inflation target band of 2.5-3.5 percent.

The consumer price inflation was 1.3 percent for the whole year of 2014, the lowest in 15 years.

The BOK said in a statement after the policy meeting that the negative output gap is forecast to continue "for a considerable time." The bank assessed the economic conditions negatively, saying domestic demand recovery was weak and export growth slowed.

The BOK cited possible change in monetary policies of advanced economics, economic instability in oil-producing countries, geopolitical risks and economic slowdown in Europe and China as negative external factors. Endi