Bank of Korea freezes key rate at 2 pct

(ATTN: RECASTS headline; UPDATES with remarks by BOK Gov. in paras 4, 11, 17-18)
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 a bid to gauge the effects
of those reductions on the economy and leave room to brace for a deeper economic
downturn.

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 trimmed the rate by 3.25 percentage points.
The central bank said it will focus its future monetary policy on heading off a
severe economic slump and stabilizing the financial markets.
"It is highly likely that economic growth will sharply fall," BOK Gov. Lee
Seong-tae told a press conference after the meeting. "The economic downturn is
expected to be longer and deeper than previously anticipated."
The central bank also said it will raise the cap on its low-rate loans to
commercial lenders to 10 trillion won (US$6.73 billion) from the current 9
trillion won. The loans, which commercial banks then re-lend solely to small and
medium enterprises, carry an annual interest of 1.25 percent.
The rate freeze comes amid a 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.
"A rise in consumer prices is expected to slow due to slumping demand although a
weaker won is exerting upward pressure on inflation," Lee said.
Gov. Lee 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 series of economic data has reinforced 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
extra budget to generate jobs and boosting the economy.
Regarding expectations that the BOK may buy government bonds, "The bank will
consider the overall financial market situation and do its part in making the
market smoothly working," Lee said.
The supply of treasury bonds is expected to increase as the government plans to
sell more debt to finance a planned additional budget.
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.
"The bank seemed to take a pause this month in a bid to gauge the effects of its
aggressive rate cuts on the economy," said Kim Jae-eun, an economist at Hana
Daetoo Securities Co. "Given lingering uncertainty about the global economy, I
think the BOK will likely resume its easing steps, probably to 1.5 percent."
sooyeon@yna.co.kr
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