South Korea freezes policy rate for 5 months amid US government shutdown

South Korea's central bank on Thursday froze its policy rate at 2.5 percent, maintaining its neutral monetary policy stance for five straight months, amid concerns over the prolonged shutdown of the U.S. government. Bank of Korea (BOK) Governor Kim Choong-soo and monetary policy board members decided unanimously to keep the benchmark seven-day repurchase rate on hold at 2.5 percent after lowering the rate in May. The seven-member committee cut borrowing costs by 25 basis points in July and October last year. "(The U.S. government shutdown) is an important issue for the U.S. economy itself, but it will also have an impact on the global economy overall. (Congress) is anticipated to resolve the issue in an appropriate manger given its influence on the world economy," Governor Kim told reporters at a press conference. The decision was in line with market consensus as experts predicted the rate freeze due to worries about the protracted shutdown of the U.S. administration. South Korean lawmakers urged the government on Tuesday to prepare for the prolonged U.S. fiscal crisis, saying that the " fiscal cliff crisis" would last even after agreements on the budget plan and debt ceiling are reached. If Congress fails to raise the current debt limit of 16.7 trillion U.S. dollars by the deadline of Oct. 17, the U.S. administration will fall into default on debt for the first time in the country's history. "Although the partisan standoff is unlikely to lead to an unprecedented government default on October 17, the continuation of the political impasse dims the outlook for the country's fourth-quarter GDP growth by the day," said Yoon Yeo-sam, a fixed- income analyst at KDB Daewoo Securities in Seoul. The U.S. budget fiasco offset modest recovery of the South Korean economy as seen in recent economic data. Exports, which account for around half of the South Korean economy, reduced 1.5 percent in September from a year earlier due to less working days, but the daily average exports reached an all- time high of 2.24 billion dollars last month, brightening outlook for the country's GDP growth in the fourth quarter. Industrial production expanded 2.8 percent on-year in August, beating market expectations. Leading economic indicators rose sharply, raising the prospect of a sustained economic growth. Concerns over the prolonged U.S. fiscal crisis lowered possibilities for the Federal Reserve to begin the tapering of its monthly bond purchases this month. "If the length of government shutdown exceeds market expectations, the probability of QE being tapered at the October FOMC meeting will decline," said Peter Park, a fixed-income analyst at the Woori Investment & Securities. After Fed Vice Chair Janet Yellen was nominated as the next Fed chief, expectations spread that the Fed would keep its current massive monetary stimulus as Yellen is widely considered as a policy "dove." "Policy coherence will be maintained as Yellen, the incumbent Vice Chair, becomes the next Fed chief," Governor Kim said. He said that consistent policy does not mean "no change" in the Fed' s monetary policy, noting that the Fed has repeatedly stressed over the reduction of massive asset purchases being "(economic) data-dependent."