Roundup: S. Korea freezes interest rates at record low despite positive signals

South Korea's central bank on Thursday froze its benchmark interest rate at an all-time low of 1.25 percent despite positive signals from the export- driven economy.

Bank of Korea (BOK) Governor Lee Ju-yeol and six other policy board members refrained from altering the seven-day repurchase rate, which has been on hold at the current level since June last year.

It was in line with market expectations. According to a Korea Financial Investment Association survey of 200 fixed-income experts, 99 percent had predicted this month's rate freeze.

Governor Lee told reporters that any need to cut rates further declined, but he said the accommodative monetary policy stance would be maintained considering trade uncertainty and geopolitical risks.

Recent economic indicators showed signs of recovery. Exports, which account for about half of the economy, kept a growth momentum for five straight months through March when the overseas shipments posted a double-digit expansion.

Retail sales, which reflect private consumption, increased 3.2 percent in February from a month earlier. Revenue in department stores grew 1.7 percent in March, with credit card usage recording a double-digit increase.

Confidence among South Korean consumers improved as political uncertainty eased following a historic ruling on March 10 to remove then President Park Geun-hye who was impeached in the parliament in December.

Global investment banks recently revised up their 2017 growth outlooks for the South Korean economy, according to data compiled by Korea Center for International Finance. It was 2.5 percent on average as of end-March, up 0.1 percentage point from a month earlier.

Positive economic indicators increased pressures on the BOK to raise its record-low policy rate in addition to the U.S. Federal Reserve's rate increase by a quarter percentage point in March.

The Fed indicated two more rate hikes later this year, which would narrow, or even reverse, a gap between policy rates of South Korea and the United States.

The U.S. policy rate is at a range of 0.75-1.00 percent, while the South Korean counterpart is 1.25 percent.

The reversal, or narrower gap, between U.S. and South Korean interest rates could trigger an abrupt foreign funds exodus from the South Korean financial market.

The South Korean economy is also struggling with massive household debts, which still increase rapidly amid the record-low borrowing costs.

Debts owed by households to banks amounted to 713.9 trillion won (625 billion U.S. dollars) as of end-March, up 2.93 trillion won from a month earlier. The debts grew almost 3 trillion won for the second consecutive month.

Households with high credit risks are moving to non-bank institutions which demand higher lending rates. Loans by non-bank deposit takers, including savings banks and credit unions, jumped 2.72 trillion won to 296.37 trillion won as of end-March.

Massive, fast-rising household debts would weigh down on private consumption as debt-serving burden began to increase amid higher market rates influenced by the Fed's rate hike. Endit