Roundup: S.Korea freezes interest rates at record low on expected U.S. rate hike

Bank of Korea (BOK), South Korea's central bank, froze its benchmark interest rate at a record low Thursday, keeping a wait-and-see stance for five straight months on signs of economic recovery and the expected rate hike in the United States.

BOK Governor Lee Ju-Yeol and six other policy board members decided to keep the benchmark 7-day repurchase rate on hold at 1.5 percent, refraining from altering the rate since July. The BOK lowered its policy rate by 25 basis points in August and October last year each, before cutting it by a quarter percentage point further in March and June this year.

The bank said in a statement that the domestic economy maintained a modest recovery trend thanks to stronger domestic demand, but it noted that external uncertainties lingered such as financial market instability in emerging economies, including South Korea, caused by the U.S. rate increase.

"It is true that there are concerns about possible side effects from the U.S. rate hike in December like capital flow from emerging to advanced economies, the dollar surge and higher interest rates," Governor Lee told reporters at a press conference.

Lee, however, noted that there is little possibility until now for such side effects to happen in South Korea, citing solid economic fundamentals, continued current account surplus and foreign debt soundness in the financial sector.

The U.S. Federal Reserve is expected to raise its zero-level policy rate in December or early next year. The U.S. rate hike tends to cause a rate hike in South Korea with a certain time gap as the belated rate increase in Seoul could cause an abrupt foreign capital outflow in search for higher-yielding assets.

The BOK's rate-freeze decision was in line with market expectations. According to a Korea Financial Investment Association survey of 111 fixed-income experts, 96.4 percent of respondents predicted the rate on hold.

The widely expected rate freeze came as the economy showed signs of recovery from the Middle East Respiratory Syndrome (MERS) outbreak that peaked in June and withered private consumption.

The country's real GDP expanded 1.2 percent in the third quarter from the previous quarter, marking the highest increase since the second quarter of 2010. It topped the BOK's earlier forecast of 1.1 percent.

Private consumption, which was hit hardest by the MERS outbreak, recovered by growing 1.1 percent in the third quarter, a turnaround from a 0.2 percent decline in the second quarter.

The finance ministry said in its monthly report that recovery in private expenditure resulted in a rise in production and investment, citing the brisk industrial activity in September.

Production in all industries increased 2.4 percent in September from a month earlier, marking the fastest monthly growth since March 2011.

As the ministry and the central bank pointed out, signs of consumption recovery were shown in recent indicators.

Credit card usage jumped 13.1 percent in October from a year earlier, and passenger car sales in the local market surged 22.7 percent during the month. Department store sales soared 17.4 percent last month, with gasoline and diesel sales rising 9.2 percent.

Some of market watchers still predicted a further rate cut by the BOK, citing faltering exports, a major engine of the export-driven economy.

Exports, which account for about half of the economy, kept a downward trend for the first 10 months of this year. The exports plunged 15.8 percent in October from a year earlier, the fastest monthly slide in more than six years.

Expectations for the rate cut remained low given massive household debts and the expected U.S. rate increase.

Household debts extended by banks here posted the biggest monthly expansion in October amid the record-low interest rate. The fast increase in household debts started from the second half of last year when the central bank adopted an expansionary monetary policy.

Money supply also recorded the largest growth in more than five years amid lower borrowing costs, with the M2, or broad money, jumping 9.4 percent in September compared with a year earlier. Enditem