The Bank of Korea (BOK) froze the seven-day repurchase rateat 2.50%.
On August 8, the BOK decided to keep interest rates on hold in a Monetary Policy Committee meeting presided by Governor Kim Choong-soo.
In fact, Korea's central bank has reached the same conclusion for the third month in a row, after slashing the key interest rate by 0.25% on May 9.
The reason for the repeat decision is that, despite predictions of improving signs of the local economy and the modest growth of consumer prices, upside & downside risks, such as concerns about China's slowdown, exist.
There is speculation that the reduction of quantitative easing (QE) by the Federal Reserve (Fed), the biggest factor in the BOK's interest rate policy, may begin this September. But the outlook remains uncertain.
Due to uncertainty over QE, central banks worldwide have been pursuing different monetary policies based on their own economic situations. For example, some emerging economies like Indonesia and Brazil, whose financial & foreign exchange markets are unstable, raised their benchmark interest rates. Australia, in contrast, slashed its rates. As for the EU, the European Central Bank (ECB) kept theirs unchanged because of an economic downturn in the region.
Meanwhile, the central bank in Seoul lowered interest rates further to the current 2.50% in May when the government drafted a revised supplementary budget, after cutting rates a quarter point to 3.00% in July and 2.75% in October last year, and then freezing interest rates repeatedly.
In a press conference,held immediately after the Monetary Policy Committee meeting, the governor said, "Overreacting to global financial market volatility is unnecessary, but we are closely monitoring the situation. We are also contemplating how to respond to external variables such as QE reduction." But he did not mention the timing of an interest rate hike in the event of such a move.
Experts consider the timing and size of QE reduction as the main factors of BOK's rate increase.
Gov. Kim pointed out, "Fed's QE cut is basically a matter of time. It will be implemented when the US economy improves. The Fed will make a decision by reviewing relevant data."
The most mentioned piece of data is the US unemployment rate.
Recently, some of the Federal Reserve Board of Governors talked about the possibility of QE reduction. As to the instability in financial markets, they said, "The market will witness repeated volatility until an exit strategy is finalized," adding, "We will act right away."
Regarding the possibility of Korea's financial losses arising from capital outflow, the BOK governor remarked, "The fundamentals of Korea's macroeconomy are sound, and its foreign currency reserves are adequate."