(4th LD) Bank of Korea freezes key rate for 11th month

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By Kim Soo-yeon
SEOUL, Jan. 8 (Yonhap) -- South Korea's central bank froze its key interest rate
for the 11th straight month on Friday and said it plans to keep its accommodative
policy stance for the time being to support the country's nascent economic
recovery.
In a monthly policy meeting, the Bank of Korea (BOK) froze the benchmark
seven-day repo rate, dubbed the base rate, at a record low of 2 percent, as
widely expected. It cut the rate by a total of 3.25 percentage points between
October 2008 and February in a bid to bolster the slumping economy.
"There is still persistent uncertainty over how the global economy will recover
this year although the overall outlook is brisk," BOK Gov. Lee Seong-tae told a
press conference.
Lee said that for now he does not see clear signs of any side effects brought
about by the record low rate, but added that there is a need for the current rate
to return to its normal level amid signs of an economic rebound.
The governor said that the bank will maintain its softer policy for the time
being to help sustain the economic recovery, but emphasized that maintaining an
easing stance does not mean no change in the rate.
The BOK reiterated in its 2010 monetary policy report released Thursday that it
will maintain its easing stance for the time being, but plans to gradually adjust
the degree of the policy this year by taking into account financial and economic
situations.
The decision to freeze the rate also came under the spotlight as the country's
vice finance minister attended the BOK's rate-setting committee for the first
time since June 1999.
The government said Thursday the vice finance minister will regularly take part
in the meeting starting this year in order to voice the government's opinion on
the overall monetary policy direction and economic management.
The move came as the government and the central bank have been at odds over when
and how to roll back emergency steps taken to combat the global economic crisis.
Observers say that such a move might inevitably hurt the BOK's independence as
committee members and the chief of the BOK could be under pressure when making
decisions that are not in line with the government's policy direction.
"The rate policy will be up to the BOK's policymakers," Lee stressed.
The rate freeze came as the South Korean economy is recovering at a
faster-than-expected pace on the back of improving domestic demand and robust
exports.
Asia's fourth-largest economy chalked up a surprise 3.2 percent gain in the third
quarter from three months earlier, the fastest expansion in more than seven
years. The government predicted in December that the Korean economy will grow 5
percent this year after an estimated 0.2 percent expansion in 2009.
But economists said the timing of a potential rate hike could be pushed back as
patches of uncertainty remain in the global economy amid tamed inflation. Some
note that the government's decision to attend the BOK's meeting could make it
difficult for the bank to conduct an early rate increase.
"The governor's remarks underscore the view that it would be impossible to expect
an early rate hike," said Kim Jae-eun, an economist at Hyundai Securities Co. "In
a situation where the government is evidently showing its commitment to boost an
economic recovery, I think that a rate increase may come in June."
Jun Min-kyu, an economist at Korea Investment & Securities Co., echoed a similar
view, saying that as Gov. Lee's four-year term finishes at the end of March and
economic uncertainty persists, a rate hike in the first quarter is not likely.
"I think a potential rate increase is expected to be pushed back to the end of
June."
The government has repeated that it will maintain an "expansionary" policy for
the time being as the economic recovery has yet to gain a solid footing.
sooyeon@yna.co.kr
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