Bank of Korea freezes key rate at 2 pct

By Kim Soo-yeon
SEOUL, March 12 (Yonhap) -- South Korea's central bank froze its key interest
rate on Thursday after six consecutive rate cuts, in an apparent bid to bolster a
weakening currency and curb rising inflation.

In a monthly policy meeting, the Bank of Korea (BOK) left the benchmark seven-day
repo rate unchanged at a record low of 2 percent for March. Between October and
February, the BOK had trimmed the rate by 3.25 percentage points.
The decision was at odds with the quarter percentage point cut forecast by 10 out
of 20 economists polled by Yonhap Infomax, the financial news arm of Yonhap News
Agency. Six experts forecast a freeze.
"The BOK seemed to hold the rate steady in March amid caution that a rate cut
would exert downward pressure on the won, which stokes inflation," said Gong
Dong-rak, a fixed-income analyst at Hana Daetoo Securities Co. "The rate freeze
also comes as the bank attempts to gauge the effects of its aggressive cuts on
the economy."
The rate freeze comes amid heated controversy over how low the key rate should go
to jumpstart the sputtering economy, which shrank 5.6 percent last quarter from
three months earlier.
Despite rate cuts by the BOK, money is still not flowing smoothly into the real
economy as lenders, wary of rising bad debt, have been increasingly reluctant to
extend loans to cash-strapped smaller firms.
Economists say the BOK seemed to take a pause this month amid fears that a rate
cut would put downward pressure on the already-weak local currency, sparking
jitters about capital flight and inflation.
South Korea's consumer prices unexpectedly rose 4.1 percent on-year in February,
accelerating from a 3.7 percent gain the previous month and marking the first
upturn in seven months due to the local currency's weakness.
A weaker won against the greenback puts upward pressure on inflation as it makes
imports more expensive. Although the local currency rebounded against the dollar
after hitting an 11-year low on March 2, its value has dipped 14.4 percent
against the greenback so far this year.
Indeed, BOK Gov. Lee Seong-tae said after the February rate-setting meeting that
while additional rate changes are possible, the central bank will adjust its pace
after closely monitoring the financial market.
But a set of economic data is reinforcing concerns that Asia's fourth-largest
economy is rapidly heading into the first recession in 11 years, due to tumbling
exports and sluggish domestic demand.
The country's industrial output tumbled a record 25.6 percent in January from a
year earlier. Exports, which account for about 60 percent of the local economy,
fell 17.1 percent on-year last month after plunging a record 33.8 percent in
January as the global recession dented demand for Korean products.
On Feb. 10, Finance Minister Yoon Jeung-hyun said that the Korean economy will
likely contract 2 percent in 2009. Gov. Lee said it is very likely that the local
economy will post negative growth this year.
The government is scrambling to unveil a set of stimulus packages, including tax
cuts and expanded spending. It is currently crafting an estimated 30 trillion won
(US$20.3 billion) extra budget to generate jobs and boosting the economy.
Although the BOK stood pat on the rate for March, many experts said its monetary
easing steps will likely continue for the next few months as there are few clear
signs that the economy will hit bottom soon
sooyeon@yna.co.kr
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