Bank of Korea Gov. Lee Ju-yeol said the bank will stay vigilant to stabilize financial markets amid growing uncertainties due to a domestic political scandal and Donald Trump unexpectedly winning the US presidential election.

Earlier in the day, the seven members of the BOK’s monetary policy board unanimously kept its key rate unchanged at a record low of 1.25 percent for the fifth straight month for November, as was widely expected by the market. 

“Uncertainties over the growth path have increased due to unexpected events at home and abroad. If prolonged, such jitters will contract economic sentiment and heighten financial volatility, which will be negative to the overall growth,” Lee said at a press briefing after announing the interest rate decision. He was referring to the recent political scandal over President Park Geun-hye and her confidante Choi Soon-sil as well as Trump’s win.

The local economy, already hit by weak exports and sluggish domestic demand, is left with no clear leadership after opposition lawmakers rejected President Park’s nomination for a new prime minister. It is unclear whether Finance Minister-designate Yim Jong-yong will take office.
 

Lee said US President-elect Donald Trump’s protectionist stance in trade would negatively affect the export-reliant Korean economy.

Lee noted, however, that it was still uncertain whether Trump’s pledges -- scrapping the Trans-Pacific Partnership, renegotiating free trade agreements and imposing high tariffs -- would turn into policies.

“Even if they become policies, their impact could be different depending on the degree, timing and intensity. His other policies on tax cuts for deregulation and growth could positively affect the Korean economy as well,” Lee said.

The BOK chief predicted that the US Federal Reserve would maintain its stance on interest rates under the new administration of Donald Trump and seek a rate hike in December.

“Markets are seeing a high possibility of a rate hike by the Fed within this year because employment and prices are improving, as the Fed said. The speed of rate hikes will not be greatly affected by the change of the administration,” Lee said.

A rate hike at the Fed does not necessarily mean an imminent rate hike at the BOK, he added.

Rising household debt was largely due to ample liquidity, but the central bank will maintain its current stance on expansionary monetary policy, Lee said.

He added that “a higher interest rate would weigh on heavily-indebted households,” signaling that a BOK rate hike is almost impossible.

Christiaan Tuntono, an economist at Credit Sui sse, said the gap between the interest rates of Korea and the US is likely to grow over the next 12 months, warning of a bigger exodus of foreign capital.

“We expect the Fed to raise the Fed funds target rate by three times over the next year including one in December, while we still see the risk of further easing in Korea under a sluggish growth outlook,” Tuntono said in a report.

A bigger gap in interest rates between the BOK and the Fed may prompt greater foreign capital outflows and weakening of the won, he said.

By Kim Yoon-mi (yoonmi@heraldcorp.com)