Bloomberg News

Bank of Korea Holds Rate as Park Vows Effort to Boost Growth

January 10, 2013

The Bank of Korea held borrowing costs unchanged for a third month amid promises from incoming President Park Geun Hye to increase efforts to support economic growth and create jobs.

Governor Kim Choong Soo and his board kept the benchmark seven-day repurchase rate at 2.75 percent after a 25 basis-point cut in October, the central bank said in a statement in Seoul today. Thirteen of 14 economists surveyed by Bloomberg News predicted the move, which Kim said was not unanimous, and one forecast a cut.

The central bank decision follows plans from Park’s government to spend 72 percent of the budget in the first half of the year to aid a recovery. At the same time, the BOK today reduced its forecast for 2013 growth to 2.8 percent from 3.2 percent, highlighting obstacles to a rebound that include the won’s 27 percent rise against the Japanese yen in the last year.

“The non-unanimous decision opens the door for a rate cut soon,” said Yoon Yeo Sam, a fixed-income analyst at Daewoo Securities Co. in Seoul. “They may cut it as early as next month to curb the won’s gain.”

The won, the best performer of the past year among 16 major currencies tracked by Bloomberg, advanced 0.4 percent to 1,056.03 per dollar as of 12:45 p.m. in Seoul, according to data compiled by Bloomberg. The Kospi index of stocks fell 0.7 percent.

Won Volatility

Kim said today he will closely monitor the won’s movements and that the central bank’s role is to control volatility in the currency through “smoothing” operations. The economy will expand 3.8 percent in 2014 and the central bank sees inflation for this year at 2.5 percent and 2.8 percent in 2014, he said.

The yen has weakened amid Prime Minister Shinzo Abe’s calls for unlimited easing, boosting South Korea’s export rival. At the same time, South Korea’s overseas sales unexpectedly declined in December for the first time in three months.

Automaker Kia Motors Corp. (000270) is among South Korean companies that may be hit by gains in the won and weakness in the yen because of their competition with Japanese counterparts, Daiwa Capital Markets said in a report last month.

The nation’s economic growth rate will probably gradually increase from the middle of this year as the global economy recovers, the central bank said on Dec. 27. Gross domestic product expanded 1.5 percent in the third quarter from a year earlier, the slowest pace since 2009.

Welfare Boost

Park, who takes office next month, in addition to the stimulus boost from the budget has promised to increase spending on welfare and unveil a 18 trillion won fund to help avoid defaults on loans. Park said in a New Year’s speech that her top priorities will be “improving people’s livelihoods and resolving the difficulties of the poor and the needy.”

“Greater fiscal stimulus reduces pressure from the Bank of Korea to support growth via cutting policy rates,” said Ronald Man, a Hong Kong-based analyst at HSBC Holdings Plc. Price pressures are also likely to rise over the year as demand increases, he said.

The central bank this year adopted a narrower target range for inflation through 2015, of between 2.5 percent and 3.5 percent. Consumer prices increased 1.4 percent from a year earlier in December, the slowest pace in four months.

To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net; Cynthia Kim in Seoul at ckim170@bloomberg.net

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


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