BOK freezes key rate for 10th month, hints at gradual rate hike

(ATTN: REWRITES lead; UPDATES with remarks by BOK governor; RECASTS throughout)
By Kim Soo-yeon
SEOUL, Dec. 10 (Yonhap) -- South Korea's central bank froze its key interest rate
for the 10th straight month on Thursday and hinted that the bank is mulling the
timing of a rate hike amid signs of an economic rebound.

"The prospect for the Korean economy is quite bright although there is some
unease in the global and local economies," Bank of Korea (BOK) Gov. Lee Seong-tae
said after the bank left the benchmark seven-day repo rate unchanged at a record
low of 2 percent.
"By reviewing economic data and inflation every month, the bank will weigh the
timing (of a possible rate hike)," Lee said, adding that the process of
normalizing the key rate needs to be gradual.
A set of economic data are underpinning optimism that the Korean economy is
quickly pulling out of its worst downturn in more than a decade, sparking debate
over when and how to roll back expansionary fiscal and monetary policies.
Asia's fourth-largest economy grew 3.2 percent in the third quarter from three
months earlier, the fastest quarterly expansion in more than seven years, due to
improving domestic demand and brisk exports.
The Korean economy is widely expected to avoid a contraction this year.
International organizations and local think tanks have put forth upbeat outlooks
for the Korean economy to around 4 and 5 percent next year.
Lee said the current level of the key rate would be too low if the economy
expands around 5 percent in 2010.
"Currently, we are standing away from the exit door. But there is the need to
move closer to the door (for a timely exit)," Lee said.
Despite the strong readings, policymakers have struck a cautious tone, citing a
murky outlook for the global economy. Analysts say the recent Dubai debt problem,
albeit somewhat eased, added fuel to economic uncertainty.
Experts are divided over when the BOK should begin to shift into a tight bias.
They said the BOK may raise borrowing costs in the first quarter of next year,
with some betting that a rate hike will be delayed until the first half.
They added that the BOK is less likely to feel burdened in weighing the timing of
a rate hike because it expanded its inflation target range for 2010-2012. The
bank set its median inflation target at 3 percent for the three-year period with
a margin of plus or minus 1 percentage point.
"The BOK will likely hike the rate in the first quarter, which is seen as the
appropriate time to start normalizing the record-low interest rate, in order to
curb inflation expectations and a possible asset bubble," said Kim Yoon-ki, an
economist at the Daishin Economic Research Institute.
The BOK cut the rate by a total of 3.25 percentage points between October 2008
and February in a bid to bolster the slumping economy.
sooyeon@yna.co.kr