Bank of Korea’s Lee Keeps Rate at 2% at Final Meeting (Update2)

March 11 (Bloomberg) -- Bank of Korea Governor Lee Seong Tae kept interest rates unchanged at his final meeting, leaving it to his successor to address political pressure to stoke economic growth.

Lee held the seven-day repurchase rate at a record-low 2 percent in Seoul today after Finance Minister Yoon Jeung Hyun said this week that now “is not the right time” to boost borrowing costs. The decision was forecast by 13 of 14 economists surveyed by Bloomberg News. One expected a quarter- point increase.

The government pressed Lee, whose term expires March 31, to hold down rates as the economy shows mixed signs: growth slowed in the fourth quarter, unemployment soared in January, exports have risen for four months and manufacturers’ confidence is at a seven-year high. Since January, Governor Lee has had to accept a vice finance minister sitting in on rate meetings.

Lee appears to have decided to “leave it to his successor to deal with the Finance Ministry pressure resisting a rate hike,” said David Cohen, a Singapore-based economist at Action Economics. “The fact that inflation narrowed a little bit in the latest report gave them a good enough reason to hold off for another month.”

Stocks, Currency

The won weakened 0.2 percent to 1,132.80 per dollar at 12:02 p.m. in Seoul, according to data compiled by Bloomberg. The currency earlier rose as much as 0.4 percent to 1,126.23. The benchmark Kospi stock index fell 0.2 percent to 1,659.15 as of 11:57 a.m. in Seoul today.

The Bank of Korea said in a statement it “will maintain the accommodative policy stance for the time being in such a way as to help sustain the trend of recovery in economic activity.”

“The central bank is unlikely to change the benchmark rate in the second quarter as it will be difficult to change the stance of monetary policy as soon as a new governor is appointed and financial-market concerns over the debt in some countries still linger,” said Lim Jiwon, an economist at JPMorgan Chase & Co. in Seoul.

President Lee Myung Bak is considering five candidates to head the Bank of Korea, DongA Ilbo newspaper reported last month, citing unidentified central bank and government officials.

These include Euh Yoon Dae, head of a presidential council set up to promote South Korea internationally; ex-Finance Minister Kang Man Soo; Kim Jong Chang, head of the Financial Supervisory Service; Park Cheul, a former deputy governor of the central bank; and Kim Choong Soo, envoy to the Paris-based Organization for Economic Cooperation and Development, according to the newspaper.

Markets Unconcerned

The failure to announce Governor Lee’s replacement three weeks before his term expires hasn’t spooked the markets. The Kospi index has risen 3.8 percent in the past month and the won gained 2.2 percent over the same period.

Finance Minister Yoon told reporters on March 8 that “it is the government’s firm belief that it is not the right time for rate hikes” as business investment is weak and prices are at manageable levels.

Lee Sung Kwon, an economist at Shinhan Investment Corp. in Seoul, said policy makers may have held off on a rate increase as “concerns over tightening measures in China remain.”

China, South Korea’s biggest export market, in February ordered banks to set aside more deposits as reserves for the second time in a month to avert asset bubbles. In the fourth quarter, Chinese gross domestic product increased 10.7 percent from a year earlier, the fastest pace since 2007.

Unemployment Rises

In contrast, South Korea’s economy expanded 0.2 percent in the fourth quarter and unemployment surged to a 10-year high of 4.8 percent in January. President Lee has put unemployment at the top of the political agenda, vowing to cut the average jobless rate to about 3 percent this year.

The government boosted this year’s budget by 3 percent to 292.8 trillion won ($258 billion) and will accelerate distribution of funds as it seeks to maintain the recovery.

The central bank said the slowdown in growth in the fourth quarter was a temporary adjustment. In November, it widened the annual inflation target range to between 2 percent and 4 percent. Consumer prices increased 2.7 percent in February.

Asia’s fourth-largest economy is showing signs of strengthening. Exports climbed 31 percent in February from a year earlier, the fourth monthly increase. Samsung Electronics Co., the world’s second-largest mobile-phone maker, said its handset shipments may expand about a fifth this year, helped by demand for smartphones.

Manufacturers’ confidence for March rose to the highest level since the fourth quarter of 2002, when the Bank of Korea published its confidence survey on a quarterly basis.

The central bank’s failure to raise rates last year confounded analysts, who forecast it to be one of the first in Asia to move after the economy expanded 3.2 percent in the third quarter, the fastest pace in seven years. Since then, Australia, China, India and Vietnam have tightened monetary policy as Asia leads the recovery from the global recession.

To contact the reporter on this story: Seonjin Cha in Seoul at scha2@bloomberg.net