Bank of Korea freezes key rate for 8th month

(ATTN: UPDATES with market close in para 7; ADDS more details and remarks by
economist in paras 9,13-14)
By Kim Soo-yeon
SEOUL, Oct. 9 (Yonhap) -- South Korea's central bank on Friday froze its key
interest rate for an eighth month and said it will maintain its soft monetary
stance for the time being while it assesses economic conditions.

The Bank of Korea (BOK) left the benchmark seven-day repo rate unchanged at a
record low of 2 percent, as widely expected. The BOK lowered the rate by a total
of 3.25 percentage points between October and February in a bid to put the brakes
on a sharp economic free-fall.
After a monthly policy meeting, BOK Gov. Lee Seong-tae said the growth of
home-backed lending eased and that the bank will closely monitor economic
performances in the fourth quarter, hinting that the central bank would be in no
hurry to tighten monetary policy.
"The growth of mortgage lending slowed recently, helped by tougher regulations.
It is too early to say housing prices are stabilizing, but if stiffened rules are
found to be effective it would lessen the burden for monetary policy
authorities," Lee said during a press conference.
Amid concerns that a recent jump in home-backed lending could spark a potential
asset bubble, Lee hinted last month that the bank may conduct a rate increase if
housing prices continue to rise. Some market players suggest a rate hike could
come as early as November.
But Lee said that the bank will maintain its accommodative policy stance for the
time being, adding that his remarks in September did not mean that a rate hike
was imminent.
Lee's comments boosted share prices and the local currency. The key stock index
closed up 1.94 percent to 1,646.79 on the Seoul bourse, and the Korean currency
closed at 1,164.5 won to the greenback, up 2.5 won from Thursday's close.
A set of economic data are fueling growing optimism that the South Korean
economy, Asia's fourth-largest, is recovering at a faster-than-expected pace.
The BOK said the economic activity is improving, but struck a cautious note that
there are still uncertainties surrounding economic recovery. The top central
banker said the third-quarter gross domestic product would be
better-than-expected, but that it would mainly result from inventory adjustments
among producers.
"Economic growth in the fourth quarter will not be bad, but it will not be as
strong as that seen in the second quarter," Lee said, adding that inflation will
likely remain stable until the first half of next year.
Amid signs of an economic rebound, questions revolve around when the BOK will
begin to shift its accommodative easing stance to a tight bias.
Tensions over rate policy have flared recently between the BOK and the
government, which has reiterated that it will stick to an "expansionary" economic
stance as it is too early to say that the economy is making a full recovery.
Economists say that the BOK is likely to keep the rate steady this year, claiming
there are still uncertainties surrounding the recovery path and that a possible
rate hike would put upward pressure on the local currency, which has gained about
35 percent to the greenback since March.
"A rate hike is not likely to come this year, given the governor's remarks and
economic assessment," said Kim Jong-su, an economist at NH Investment &
Securities Co. "The BOK may conduct a rate increase in the first quarter of next
year, given Lee's comments that the strength of current easing steps is quite
substantial."
sooyeon@yna.co.kr
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