Bloomberg News

Bank of Korea Holds Benchmark Rate for 12th Month

June 08, 2012

Bank of Korea Holds Rate for 12th Month on Europe, China Woes

Pedestrians walk in front of the Bank of Korea headquarters in Seoul. Photographer: Jean Chung/Bloomberg

The Bank of Korea held off from altering borrowing costs for a 12th straight month as easing inflation gave policy makers room to wait and see how Europe’s debt crisis and China’s slowdown affect the economy.

Governor Kim Choong Soo and his board kept the benchmark seven-day repurchase rate unchanged at 3.25 percent as predicted by all 15 economists surveyed by Bloomberg News. The decision was unanimous and the board didn’t discuss a possible increase or cut, Kim told reporters after the meeting.

South Korea has braced for weaker demand for its cars and electronics as European leaders struggle to coordinate a response to turmoil threatening global growth. While China yesterday unveiled its first cut to borrowing costs since 2008, Federal Reserve Chairman Ben S. Bernanke refrained from discussing potential steps to aid the economy.

“The Bank of Korea’s baseline is one of steady, if slow global recovery that would not warrant interest rate cuts,” said Erik Lueth, a Hong Kong-based economist at Royal Bank of Scotland Group Plc. “However, the bank stands ready to ease policy if downside risks materialize.”

The won weakened 0.3 percent to 1,174.55 per dollar as of 1:18 p.m. in Seoul after touching a two-week high following China’s rate action, according to data compiled by Bloomberg. The Kospi index of stocks declined 0.5 percent.

Inflation Expectations

Bank of Korea policy makers cited elevated inflation expectations while noting that downside risk due to the political situation in Europe is increasing, according to a statement distributed after today’s meeting. Members will “conduct monetary policy so as to stabilize consumer price inflation at the midpoint of the inflation target over a medium- term horizon amid continuing sound growth of the economy,” it said.

China’s surprise rate cut will have an “indirect” impact on his nation’s economy, Governor Kim said.

South Korean officials are trying to sustain growth in Asia’s fourth-biggest economy after corporate investment and government spending fueled the fastest expansion in a year in the first quarter. Exports have contracted in all but one month this year, while inflation remained at a 21-month low of 2.5 percent in May.

“Governor Kim sounded less hawkish today than in May when it comes to the central bank’s will to normalize interest rates,” said Yoon Yeo Sam, a fixed-income analyst at Daewoo Securities Co. in Seoul. “If the second-quarter economic data turns out to be far weaker than expected, the BOK will cut interest rates in July or August while slashing its growth forecast.”

Clouded Outlook

A slowdown in China, the risk of a Greek exit from the euro and rising Spanish borrowing costs are clouding the outlook for overseas sales, which account for about half of South Korea’s gross domestic product. China, whose economy expanded at the slowest pace in almost three years in the first quarter, buys about a quarter of South Korean products.

Exports to China dropped 10.3 percent and shipments to the U.S. fell 16.5 percent in the first 20 days of May, the most recent data available, according to a government report. South Korea’s sales to the European Union declined 16.4 percent in that time.

Still, data from the region has been mixed, with Australia’s gross domestic product expanding 1.3 percent last quarter from the previous three months, compared with the median 0.6 percent gain predicted by economists in a Bloomberg News survey.

Rate Cuts

This week the Reserve Bank of Australia cut its benchmark interest rate by a quarter percentage point to the lowest since 2009 and China, in addition to the rate move, loosened controls on banks’ lending and deposit rates. Indian Prime Minister Manmohan Singh pledged to revive growth in Asia’s third-largest economy through infrastructure spending.

Bernanke told a Congressional committee yesterday that policy makers will discuss later this month whether to do more to spur growth, though he said the steps they could take may have “diminishing returns.”

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


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