Bloomberg News

Bank of Korea Holds Rate for Eighth Month as Growth Slows

February 09, 2012

(Updates with economist’s comments in fourth paragraph.)

Feb. 9 (Bloomberg) -- The Bank of Korea held off raising borrowing costs for an eighth straight month as the economy slowed and exports declined due to the European debt crisis.

Governor Kim Choong Soo and his board kept the benchmark seven-day repurchase rate unchanged at 3.25 percent, the central bank said in a statement in Seoul today. The decision was predicted by 18 of 19 economists surveyed by Bloomberg News.

Policy makers in export-driven Asian countries have relied on monetary or fiscal stimulus to weather the European debt crisis. Australia unexpectedly held off cutting interest rates this week on signs of improvements in the U.S. and Europe. South Korea’s economy may gradually pick up pace in the second half as global conditions improve, the Bank of Korea said this week.

“The BOK’s cautious stance, emphasizing policy normalization, won’t be easily changed by a few months’ data,” Oh Suk Tae, an economist at SC First Bank Korea Ltd. in Seoul, said before the announcement. “Most economic data on growth now clearly support monetary easing. Still, inflation concerns among policy makers as well as the general public remain elevated.”

The Kospi share index fell 1 percent as of 10:12 a.m. in Seoul. The won traded 0.4 percent lower against the dollar, according to data compiled by Bloomberg.

U.S. growth, “robust” indicators from China and progress in taming Europe’s debt crisis encouraged Australian policy makers to keep rates on hold this week, the central bank indicated. Over the past three weeks, Sri Lanka raised rates, Thailand cut and Malaysia and New Zealand made no change. India also paused, while cutting reserve requirements for banks.

‘Upturn’

Asia’s fourth-largest economy, which grew the least last quarter in two years, is getting some fiscal support from plans for 60 percent of this year’s government spending to occur in the first six months. The central bank and government forecast 3.7 percent growth this year after a 3.6 percent gain last year.

“The upturn in the overall trend in shipments will remain intact over the next few months,” Wai Ho Leong, a senior regional economist at Barclays Capital in Singapore, said. Key supports are the upturn in the activity indicators of Korea’s export markets, including the revival in the U.S. ISM new orders index and the January reading for the China NBS PMI, he said.

Overseas Shipments

Overseas shipments, equivalent to half of the economy, unexpectedly fell 6.6 percent in January from a year earlier, the first drop in more than two years, according to a government report on Feb. 1. Hyundai Motor Co., South Korea’s largest automaker, reported a jump in fourth-quarter profit, fueled by U.S. demand.

Last month, the International Monetary Fund lowered its estimate for global growth this year to 3.3 percent from a September forecast of 4 percent, warning that the European debt crisis threatens to derail the world economy. The euro area may enter a “mild recession” in 2012 as it shrinks 0.5 percent. South Korea’s growth forecast for this year was cut to 3.5 percent from 4.4 percent.

A dip in the Korean inflation rate to 3.4 percent in January was largely because of a high year-earlier level, the central bank said in a report to the National Assembly this week. Price pressures will likely persist on elevated inflation expectations and unstable oil costs, it said. The expected inflation rate over the next year was 4.1 percent in January, according to a BOK survey last month.

“The respite is likely to be temporary, given that inflation expectations remain unanchored,” Leong at Barclays said. There are “significant upside risks” for services costs and core inflation given the public transport fare increases and the possibility of another boost to electricity tariffs.

--With assistance from Sarina Yoo in Seoul. Editors: Iain Wilson, Brendan Murray

To contact the reporter 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


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