Bloomberg News

Bank of Korea Keeps Rates on Hold to Monitor Europe’s Crisis

July 14, 2011

July 14 (Bloomberg) -- The Bank of Korea kept interest rates unchanged after an increase in June as policy makers monitor the threat posed by Europe’s sovereign debt crisis.

Governor Kim Choong Soo and his board held the benchmark seven-day repurchase rate at 3.25 percent, the central bank said in a statement in Seoul today. The decision was predicted by 13 of 14 economists surveyed by Bloomberg News. It raised rates by a quarter-percentage point each in January, March and June.

With inflation exceeding its 4 percent target limit every month this year, the central bank will probably boost borrowing costs twice more in 2011, according to the median forecast of economists in a Bloomberg News survey. The unanimous rate decision today reflected policy makers’ concern about Europe’s sovereign debt crisis, Governor Kim Choong Soo said.

Future moves by the Bank of Korea “will really depend on how the global markets cope with the sovereign issues that are going on right now, and the pace of global growth,” Shaun Cochran, head of Korea research at CLSA Asia-Pacific Markets, said in an interview with Bloomberg Television.

The won rose 0.4 percent to 1,056.08 per dollar as of 12:05 p.m. in Seoul after the decision. The South Korean currency has climbed more than 6 percent against the dollar so far this year, the fastest among major Asian currencies. The Kospi stock index dropped 0.6 percent.

The Bank of Korea will put a “greater emphasis” on price stability while ensuring sound growth, it said in a statement after the decision, reiterating its stance stated last month.

Accelerating Inflation

Consumer prices in South Korea rose 4.4 percent in June from a year earlier, the sixth month in a row they overshot the central bank’s target of 2 percent to 4 percent increases through 2012. Core prices, which exclude energy and food, advanced 3.7 percent last month, the fastest gain in two years.

With a pending increase in electricity rates and relatively low prices a year earlier to compare with, inflation “will likely stay high above 4 percent until the fourth quarter,” said Ma Tieying, an economist with DBS Bank in Singapore.

Seven out of eight analysts expect the Bank of Korea to raise its benchmark rate to 3.5 percent from 3.25 percent during the current quarter, and six out of the eight forecast a further increase to 3.75 percent in the fourth quarter, according to a survey by Bloomberg News.

‘Sensitivity to Inflation’

“We are still expecting two more rate hikes, from as early as August, given that core inflation appears to be worsening,” said Wai Ho Leong, a senior regional economist at Barclays Capital in Singapore. “The sensitivity to inflation is also rising,” with elections coming up next year, he said.

Parliamentary elections are scheduled for next spring while the presidential election is slated for December 2012. Persistent inflation is weighing on popular support for President Lee Myung Bak, with his approval rating at 32.5 percent this month compared with 76 percent when he came to power in February 2008, according to Seoul-based Realmeter.

Exports, equivalent to about half of the economy, increased at the slowest pace since October 2009 last month. Samsung Electronics Co., the world’s largest maker of televisions, said last week its second-quarter profit decreased 26 percent due to a slump in flat screen sales.

Higher borrowing costs may discourage people from taking out new loans, helping slow the increase in household debt, Ma said. Such debt climbed to a record 801.4 trillion won ($759 billion) at the end of the first quarter.

Finance Minister Bahk Jae Wan said this week that borrowing levels may cause a “considerable shock” to the economy if interest rates rise quickly or the property market weakens.

South Korea’s economy expanded 1.3 percent in the three months through March from the previous quarter after a 0.5 percent gain in the final quarter of 2010.

The central bank has raised interest rate from a record-low 2 percent since last July as it expects consumer prices to rise 3.9 percent this year, while the economy will grow 4.5 percent. The bank will revise its growth and inflation forecasts tomorrow.

--With assistance from Rishaad Salamat, Seyoon Kim and Sarina Yoo in Seoul. Editors: Ken McCallum, Paul Panckhurst

To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net; Rose Kim in Seoul at rkim69@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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