Bank of Korea Unexpectedly Keeps Rate Unchanged to Watch Won
May 13, 2011, 1:20 AM EDTBy Eunkyung Seo
(Updates with BOK governor comment in the sixth paragraph.)
May 13 (Bloomberg) -- The Bank of Korea unexpectedly kept interest rates unchanged after two increases this year, opting to judge whether gains in the won will contribute to a slowdown in inflation.
Governor Kim Choong Soo and the policy board left the benchmark seven-day repurchase rate at 3 percent after boosting it by a quarter of percentage point each in January and March, the central bank said in a statement in Seoul today. The decision was predicted by two of 14 economists surveyed by Bloomberg News. The decision wasn’t unanimous, Kim said.
The won fell to a three-week low and South Korean bonds rose after the central bank refrained from raising rates even as inflation exceeded its 4 percent ceiling for four straight months. Governor Kim said he wanted to monitor factors such as the European debt crisis, Japan’s March 11 earthquake and oil price swings, while also noting that inflation hasn’t stabilized.
“The pause is reflective of general central bank caution in raising rates quickly,” said Erik Lueth, a Hong Kong-based economist at Royal Bank of Scotland Group Plc. “It was hard to say whether BOK would pause one or two meetings. They opted for the latter,” he said, adding he expects an interest rate increase in June.
Won Weakens
The won declined 0.5 percent at 1:25 p.m. in Seoul, after falling as low as 1,092.38 to the dollar earlier, the weakest level since April 19, according to data compiled by Bloomberg. The Kospi stock index fell 0.53 percent. The yield on the benchmark three-year bond fell seven basis points to 3.6 percent, the biggest decline since April 1. The won has strengthened about 3 percent so far this year.
This was the sixth time in the last 12 months that the central bank’s decision was different from consensus economist predictions. Kim told reporters that when he said the bank will take “baby-step” moves to “normalize” interest rates, he didn’t necessarily mean the bank would raise rates every two months.
While South Korea’s inflation hasn’t stabilized, about half of the price increase is the result of higher supply costs, which are beyond the central bank’s control, Kim said. The won’s appreciation can help curb price gains, he said.
‘Adverse’ Environment
Samsung Electronics Co. expects an “adverse” business environment due to a possible global slowdown to continue in the second quarter, Robert Yi, vice president of investor relations, said on April 29. The world’s largest maker of TVs and flat- screen panels reported a drop in first-quarter profit that day.
“The Bank of Korea may want to wait and see how oil prices and other external factors will change,” Jun Min Kyoo, an economist at Korea Investment & Securities Co. in Seoul, said before the announcement. “Fears of further gains in the won due to a rate hike would have been another reason to stand pat.”
Consumer prices rose 4.2 percent in April from a year earlier, the fourth month in a row the pace of growth surpassed the central bank’s target of 2 percent to 4 percent through 2012. The Bank of Korea expects consumer prices to rise 3.9 percent this year and for the economy to grow 4.5 percent.
President Lee Myung Bak declared “war” on inflation in January, and the government imposed price controls and tolerated currency appreciation to tame price increases.
Approval Rating Halved
Lee’s approval rating has halved to 33 percent since he took office in February 2008, according to an April 18-22 poll by Seoul-based Realmeter. A general legislative vote will be held next April and the next presidential election is in December 2012.
Crude oil traded near $100 a barrel today, and has climbed about 8 percent this year. South Korea relies entirely on imported oil.
Strengthening exports and recovering domestic demand last year drove the fastest growth since 2002 in South Korea, stoking inflation pressure and prompting the central bank to raise interest rates from a record-low 2 percent since early July.
The nation’s exports climbed 26.6 percent from a year earlier to a record in April as exporters weathered the won’s gains. The unemployment rate fell to a three-month low last month, underscoring the tight labor conditions in South Korea and pointing to pressure to raise wages, said Wai Ho Leong, a senior regional economist at Barclays Capital in Singapore.
In another sign of inflationary pressure, South Korea’s bank lending to households rose to a record for the third straight month in April as people took out more mortgages, Bank of Korea data showed yesterday.
--With assistance by Sarina Yoo, Jun Yang and Bomi Lim in Seoul. Editors: Ken McCallum, Lily Nonomiya
To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net
To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net
