Roundup: S.Korea freezes interest rates to wait and see effect of June rate cut

South Korea's central bank on Thursday froze interest rates at an all-time low of 1.25 percent to wait and see the effect from the rate cut in the previous month.

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 1.25 percent. The bank cut it by a quarter percentage point in June.

The June rate cut came amid growing worries about negative effects from the government-led corporate restructuring in shipbuilding and shipping industries.

The government announced about 10 trillion won (8.8 billion U.S. dollars) in supplementary budget for the second half of this year on expectations that economic situations would be worse in the second half than in the first half due to the ongoing corporate restructuring.

The BOK sought to wait and see how the fiscal and monetary stimulus last month would affect the faltering economy, refraining from altering the policy rate.

The bank said in a statement that South Korea's economy would continue a modest growth trend on the back of an expansionary macro-economic policy despite sagging exports that were offset by improved private consumption.

The statement, however, noted that the economy faced high uncertainties in its growth path in consideration of economic conditions at home and abroad.

Under the self-restructuring plan, South Korea's top three shipbuilders, including Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering, plan to reduce overcapacity by 20 percent and cut workforce by 30 percent by the end of 2018.

The jobless rate kept rising in the country's southeastern coastal region where main shipyards are located, and some of irregular workers in subcontractors of the shipbuilders killed themselves as they were too discouraged to find a new job after being laid off.

Despite the sluggish economy, it would be hard for the BOK to cut rates further on worries that foreign capital may flow out of the South Korean market following the Brexit, or British referendum to leave the European Union (EU).

If the BOK cut rates further while the U.S. Federal Reserve raises interest rates, foreign capital exodus may happen. The Fed is expected to life rates at least once by the end of this year.

Though banks tightened standards to lend money to households, household debts continued to maintain a record-breaking trend. The already record-low interest rate is feared to increase such debts at a swift pace.

Household debts topped 1,200 trillion won (1.05 trillion U.S. dollars), keeping a record-breaking trend. Debts owed by households to banks increased 6.6 trillion won from a month earlier to 667.5 trillion won as of end-June.

Meanwhile, some predicted the BOK's rate cut in consideration of the expected shocks from the corporate restructuring. Nomura and Goldman Sachs forecast the BOK's rate cut once or twice within this year.

Following the rate-setting meeting, the central bank revised down its 2016 growth forecast to 2.7 percent from 2.8 percent estimated three months earlier.

The forecast for consumer price inflation in 2016 was downgraded from 1.2 percent to 1.1 percent. Endit