BOK HITS AT RATE HIKE

REWRITES paras 2,5,10; ADDS more info in last 3 paras)
SEOUL, Dec. 31 (Yonhap) -- South Korea's central bank will adjust the pace and
depth of its accommodative monetary policy in the New Year while taking into
account financial and economic conditions, its chief said Thursday.

The South Korean economy is recovering at a faster-than-expected pace, aided by
improving domestic demand and robust exports, sparking heated debate over when
and how the Bank of Korea (BOK) should begin to raise its key interest rate.
"For the time being, the central bank plans to manage the rate policy in a way
that will help boost the economic recovery," BOK Gov. Lee Seong-tae said in a New
Year's message. "There is a need to underpin growth momentum of the private
sector by maintaining the accommodative stance."
"But we must also be careful of the problems that a long-standing accommodative
policy could bring upon the economy," Lee said.
The governor said the bank will adjust the current easing policy at an
appropriate speed and by a proper margin down the road, while taking into
consideration the financial and economic situation at home and abroad.
The BOK froze the base rate at a record low 2 percent for the 10th straight month
in December after cutting it by a total of 3.25 percentage points between October
2008 and February in a bid to bolster the slumping economy.
Asia's fourth-largest economy grew 3.2 percent in the third quarter from three
months earlier, the fastest expansion in more than seven years.
The government said in early December that the Korean economy is forecast to grow
0.2 percent this year, avoiding a yearly contraction, before jumping 5 percent
next year. The BOK said the local economy is forecast to expand 4.6 percent next
year.
On Dec. 10, Lee hinted that the bank will mull the timing of a rate hike amid
growing prospects of an economic rebound, saying that the current rate would be
too low if the economy expands around 5 percent next year.
He said inflationary pressure is likely to grow gradually after the second half
of next year. South Korea's consumer prices rose an average of 2.8 percent in
2009. The bank aimed to maintain inflation between 2.5 and 3.5 percent until this
year.
The governor said the Korean economy's capacity to cope with external shocks must
be strengthened by applying lessons from the global financial meltdown.
"There should be more attention to household debt and asset price movements in
order to stem possible asset bubbles," Lee added.
The central bank added that it plans to gradually lower the cap on low-rate loans
it offers to small businesses by taking into account the financial market
conditions.
The BOK raised the limit by a combined 3.5 trillion won to 10 trillion won
between October 2008 and March to help smaller firms cope with the funding
squeeze sparked by global financial turbulence. It decided last week to freeze
the cap for the first quarter of next year, unchanged from the fourth quarter.
The loans, which the BOK extends through commercial banks to small and medium
enterprises, carry an annual interest of 1.25 percent.
sooyeon@yna.co.kr
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