Bank of Korea Keeps Rate Unchanged at Record-Low 2%
The Bank of Korea kept its interest rate unchanged today for a fourth month amid evidence record-low borrowing costs and fiscal stimulus are reviving the economy.
Governor Lee Seong Tae and his board left the seven-day repurchase rate at 2 percent in Seoul, as expected by all 15 economists surveyed by Bloomberg. The bank cut borrowing costs by 3.25 percentage points since October, the most aggressive easing since it began setting a policy rate a decade ago.
The Kospi stock index has gained 26 percent this year and the won has climbed by a fifth in the past three months on speculation the economy has passed its worst. New Zealand kept its benchmark rate unchanged at 2.5 percent today and Thailand last month ended its series of rate cuts as Asia-Pacific central bankers assess the region’s recovery from the global recession.
“There are signs the financial crisis has passed a critical point and the economic slump is easing,” said Park Hyuk Soo, a fixed-income analyst at Dongbu Securities Co. in Seoul. “The central bank is likely to keep rates where they are through the end of the year while gauging further recovery signs.”
The Kospi index rose 0.4 percent to 1,420.89 at 1 p.m. in Seoul. The won fell 0.4 percent to 1,251.60 per dollar.
South Korea joined India and China as one of the few major economies that expanded in the first quarter of 2009. The $929 billion economy grew 0.1 percent last quarter from the previous three months, when it contracted 5.1 percent.
Factory output increased for a fourth month in April and consumers became the most confident in almost two years in May.
Slump Over
“We think any drastic slowdown in the economy is over but there still are lots of uncertainties on how much the economy will rebound,” Governor Lee told reporters in Seoul today. “There are some factors that raise concerns in terms of prices, but the central bank’s stance is that it’s appropriate for overall monetary policy to be accommodative.”
Finance Minister Yoon Jeung Hyun said yesterday domestic financial markets have been stable in the face of increased tensions with North Korea payday advance online. The communist North tested a nuclear weapon in May and threatened military strikes against the South.
“The local economy is continuing its recovery trend and the global economic slump is showing signs of easing,” the finance ministry said on June 4. “Still, it’s too early to be optimistic about the outlook as there are uncertainties in the global markets, concerns about rising oil and the recovery is weak.”
Signs of Weakness
Among signs of weakness, exports fell at the fastest pace in four months in May as demand from major buyers including Japan, China and the U.S. slumped. Overseas shipments are about 60 percent of South Korea’s gross domestic product.
The jobless rate rose in May to the highest level in almost four years as slowing sales prompted manufacturers, builders and retailers to reduce their workforce to rein in costs.
To stoke economic growth, parliament on April 30 approved a 17.2 trillion-won ($13.8 billion) package of cash handouts, cheap loans, labor-market aid and infrastructure spending. That adds to the 50 trillion won in relief measures already allocated.
The Bank of Korea may even have to raise interest rates toward the end of the year as growth picks up and pressures on prices increase, according to economist Kwon Young Sun.
“It’s a matter of the central bank’s credibility to try to anchor inflation expectations,” said Kwon, from Nomura International Ltd. in Hong Kong. “Asset prices are likely to rise in coming months and the key point will be when the central bank’s policy focus changes to controlling inflation.”
Consumer prices rose 2.7 percent in May from a year earlier, the slowest pace in almost two years. The central bank aims to keep inflation between 2.5 percent and 3.5 percent on average.