Bank of Korea freezes key rate for 8th month

By Kim Soo-yeon
SEOUL, Oct. 9 (Yonhap) -- South Korea's central bank froze its key interest rate
for the eighth straight month on Friday as a nascent economic recovery has yet to
prove sustainable amid tamed 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. 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.
The decision is in line with a forecast by all economists at 16 financial
institutions polled by Yonhap Infomax, the financial news arm of Yonhap News
Agency.
"Inflationary pressure has been tamed and the local economy is not in a
full-fledged recovery phase," said Lee Sung-kwon, an economist at Shinhan
Investment Corp.
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,
raising market expectations that the BOK may hike the rate in the near term.
South Korea's industrial output posted an on-year expansion for the second
straight month in August. In September, Korea's exports stopped a 10-month run of
double-digit annual declines.
Analysts said the question revolves around when the BOK will begin to shift its
accommodative easing stance to a tight bias.
Tensions over a 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.
But amid concerns that a surge in home-backed lending may spark a potential asset
bubble, BOK Gov. Lee Seong-tae hinted on Sept. 10 that the bank may conduct a
rate increase if housing prices continue to rise.
Some experts say the Australian central bank's unexpected rate hike could give
some room for the BOK to raise borrowing costs as the move suggested the timing
for implementing an exit strategy could differ depending on each country's
economic fundamentals. The Reserve Bank of Australia raised the key rate on
Tuesday, becoming the first central bank among the Group of 20 countries to do so
since the global financial crisis started.
Economists are divided over the timing of a rate hike, with some arguing that the
BOK is likely to increase the rate as early as November.
But others said the BOK is expected to take action in the first quarter of next
year, saying that there are still uncertainties surrounding the economic recovery
and a possible rate hike would put upward pressure on the local currency, which
has gained about 35 percent to the greenback since March.
sooyeon@yna.co.kr
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