Bloomberg News

Bank of Korea Holds Rate for Fifth Month on Global Slowdown

November 13, 2011

(Updates with Governor Kim comment in third paragraph.)

Nov. 11 (Bloomberg) -- The Bank of Korea held off from raising borrowing costs for a fifth straight month as Europe’s deepening debt crisis and slowing domestic growth prompt the central bank to pause its fight against inflation.

Governor Kim Choong Soo and his board kept 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 all 17 economists surveyed by Bloomberg News. Kim told reporters that the vote was unanimous.

Kim’s board joins policy makers from China to Indonesia to Australia that have moved to support economic growth by refraining from raising borrowing costs or by lowering them. Kim said today that the board didn’t discuss reducing rates and that the central bank can’t take policy action until global financial markets stabilize from Europe’s debt woes.

“Governor Kim made it clear that the bank will not cut interest rates unless the European debt crisis escalates into a global economic and systemic crisis as seen in 2008,” said Kong Dong Rak, a fixed-income analyst at Taurus Investment & Securities Co. in Seoul. He expects the Bank of Korea to raise rates in May or June next year, “only after the dust settles a bit in Europe.”

South Korean bonds fell after Kim said the board didn’t discuss cutting rates and that today’s decision was unanimous. The yield on the government’s benchmark three-year bonds rose three basis points, or 0.03 percentage point, to 3.37 percent, Korea Exchange Inc. prices show.

The Kospi share index gained 2.4 percent as of 12:40 p.m. in Seoul. The won rose 1 percent to 1,123.50 per dollar, according to data compiled by Bloomberg.

‘Dangerous Phase’

The global economy is in a “dangerous phase” and the world needs to act together or it may face a “lost decade,” Christine Lagarde, the managing director of the International Monetary Fund, said in Beijing this week. Some Asian nations should pause on monetary tightening, she said, without identifying any. Italy’s government bond yields rose above 7 percent this week.

“Our view that rates are still accommodative has not changed,” Kim told a news conference. “But we cannot move ahead without considering what’s happening outside.” He also said the nation’s exposure to Italy is small and that he doesn’t expect the European debt crisis to spread to France.

Pause on Policy

South Korea’s central bank has stood pat on interest rates since June after three increases in the first half of the year. Indonesia lowered rates for a second straight month yesterday while Australia reduced borrowing costs for the first time since 2009 on Nov. 1. China last raised rates in July.

Recent data signal that faltering overseas demand is taking a toll on Asia’s fourth-largest economy. Exports, equivalent to about half the economy, gained 9.3 percent in October from a year earlier, the slowest pace in two years. Gross domestic product growth decelerated in the third quarter as companies cut spending.

Weaker overseas demand may erode the earnings of South Korea’s largest exporters.

LG Electronics Inc. reported a wider-than-estimated quarterly loss in the the three months ended September as mobile-phone sales missed forecasts and earnings fell at its flat-panel unit.

Posco, the world’s third-biggest steelmaker, said Oct. 21 that it plans to cut spending and reduce costs after third- quarter profit plunged on weaker demand.

Inflation Moderates

Inflation slowed last month to within the central bank’s target for the first time this year, reducing pressure on the Bank of Korea to raise interest rates. Consumer prices rose 3.9 percent in October from a year earlier, below the central bank’s 4 percent target ceiling.

The inflation rate is expected to “fluctuate at a high level for the time being,” given factors such as increases in public utility charges and high inflation expectations, the Bank of Korea said in a statement today.

South Koreans expect an inflation rate of 4.2 percent over the next 12 months, according to a survey by the central bank last month. They predicted 4.3 percent in September.

“Headline inflation is expected to fall further on the back of stabilizing food prices, base effect, and economic growth already showing signs of moderation,” said Chang Jae Chul, an economist at Citigroup Global Markets Inc. in Seoul. Chang expects the Bank of Korea to hold off on raising interest rates in coming months.

--With assistance from Sarina Yoo in Seoul. Editors: Ken McCallum, Brendan Murray

To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net; William Sim in Seoul at wsim2@bloomberg.net

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


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