(2nd LD) Bank of Korea freezes key rate at 2 pct

(ATTN: RECASTS first 7 paras; UPDATES with more details and remarks by BOK Gov. in
paras 5, 14; TRIMS throughout)
By Kim Soo-yeon
SEOUL, May 12 (Yonhap) -- South Korea's central bank froze its key interest rate
for a third straight month on Tuesday, saying that although the slowing pace of
the economy has clearly eased, downside risks to growth linger.
The Bank of Korea (BOK) said it is too early to talk about absorbing liquidity
that authorities have supplied into the market, signaling that it would hold the
rate steady for the time being.
In a monthly policy meeting, the BOK left the benchmark seven-day repo rate
unchanged at a record low of 2 percent, as widely expected. The BOK had made six
consecutive rate cuts totaling 3.25 percentage points until February in a bid to
bolster the slumping economy.
The central bank said it will maintain an easing stance for the time being and
focus its future monetary policy on bolstering growth and stabilizing the
financial markets.
"Although the economy is not in recession, it is difficult to say that the
economy is markedly improving," BOK Gov. Lee Seong-tae, told a press conference.
"Uneasiness still persists."
A set of economic indicators are reinforcing cautious optimism that the Korean
economy, Asia's fourth-largest, may be approaching its bottom, but it is still
unclear whether the economy is entering a recovery phase.
"In recent months, the pace of the downturn in economic activity has clearly
eased...The Korean economy is likely to post mildly positive growth on-quarter,
but a high degree of uncertainty lingers given the existence of both upside and
downside risks," the BOK said.
The South Korean economy narrowly averted a recession, or two straight quarters
of contraction, by growing 0.1 percent in the first quarter from three months
earlier. It shrank 5.1 percent in the last quarter of 2008.
In March, the country's industrial output grew 4.8 percent from a month earlier,
maintaining an on-month expansion from January. South Korea posted a record trade
surplus of US$6 billion in April.
Local financial markets have also been stabilizing, thanks largely to a buying
spree of Korean stocks by foreign investors. The Seoul bourse has risen over 25
percent so far this year and the Korean currency has gained almost 27 percent to
the greenback since hitting an 11-year low on March 2.
But despite some budding signs of a turnaround, the government has struck a
cautious note, saying it is difficult to predict the timing of a sustained
economic recovery due to bleak external conditions.
The local job market has continued to take hits, prompting more households to cut
back on their spending. The country's jobless rate rose to 4 percent in March and
job losses accelerated.
On concerns over rising short-term liquidity, the finance ministry said last week
it is not the time to absorb the money that authorities have pumped into the
markets, given current economic conditions. But the government added it will
closely monitor the overall money flow.
"Currently, liquidity is not seen as excessive. But as the short-term money
supply is growing fast, there is a need to watch how such money flows are
affecting the financial markets and the real economy," the governor said.
Experts say it is unlikely that the central bank is already mulling raising the
key rate, as the real economy is still in a contraction phase and credit is not
fully flowing.
Economists said the BOK may hold off on taking any more monetary easing measures
this year, as long as the economy does not abruptly deteriorate.
The BOK predicted that the Korean economy will contract 2.4 percent this year,
the worst performance in 11 years, stung by falling exports and weakening
domestic demand.
sooyeon@yna.co.kr
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