Bank of Korea Leaves Interest Rate Unchanged as Recovery Slows
Bank of Korea governor, Kim Choong Soo
Seokyong Lee/Bloomberg
Kim Choong Soo, governor of the Bank of Korea.
Kim Choong Soo, governor of the Bank of Korea. Photographer: Seokyong Lee/Bloomberg
Sept. 9 (Bloomberg) -- Kwon Goohoon, co-head of Korean research at Goldman Sachs Group Inc., talks about the outlook for the South Korean economy. The Bank of Korea unexpectedly left its benchmark interest rate unchanged, a sign of concern that slowing external demand will hurt exports in Asia’s fourth-biggest economy. Kwon also discusses the impact of a weaker won on Korean exporters. He talks from Seoul with Rishaad Salamat on Bloomberg Television. (Source: Bloomberg)
Sept. 9 (Bloomberg) -- Dariusz Kowalczyk, Hong-Kong based senior economist at Credit Agricole CIB, talks about the outlook for the South Korean won. The currency climbed to its strongest in a month on speculation the nation’s rising exports and an improving economy will spur inflows. The central bank today unexpectedly refrained from raising interest rates to support growth. Kowalczyk also discusses the outlook for the global economy, and the Obama administration's policies. He talks with Linzie Janis on Bloomberg Television's "Global Connection." (Source: Bloomberg)
The Bank of Korea unexpectedly left its benchmark interest rate unchanged, a sign of concern that slowing external demand will hurt exports in Asia’s fourth- biggest economy.
Governor Kim Choong Soo kept the seven-day repurchase rate at 2.25 percent, the central bank said in a statement in Seoul today. Only four of 14 economists surveyed by Bloomberg News predicted the result, with the rest forecasting a quarter-point increase following a similar move in July.
South Korean officials joined counterparts in Australia and Japan this week in flagging worries about the strength of the global recovery amid elevated U.S. unemployment and potential losses at European banks. At the same time, any prolonged BOK delay in raising borrowing costs may risk faster inflation.
“Another move is delayed due to rising global uncertainties,” said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul. “Still, the central bank will likely raise rates again next month or later to stem price pressures.”
The won lost gains immediately after the decision before recouping the advance. It was up 0.3 percent at 1,169.4 per dollar as of 12:39 a.m. in Seoul. The KOSPI index of stocks was little changed at 1,778.18.
Global Growth
Cooling global growth has soured prospects for the trade gains that propelled South Korea’s economy to the fastest first- half expansion in a decade. A possible U.S. slowdown and persistent European fiscal problems are risks to economic growth, the central bank said in a statement after the decision.
Uncertainty over the international outlook has increased recently, though a global double-dip recession appears “unlikely,” Governor Kim told reporters after leaving borrowing costs unchanged. While 2.25 percent is not the “most desirable level,” it will take some time to normalize the benchmark as the bank must be certain of the world economic recovery, he said.
The central bank reiterated it will focus on ensuring price stability and sustaining sound economic growth under an accommodative policy stance.
While there will be “moderation” in the pace of South Korea’s expansion in the second half, there is scope for further increases in interest rates, the International Monetary Fund said last week. The Washington-based lender estimates the economy will grow 6.1 percent this year.
“The neutral interest rate, which would be the rate at which you support employment and activity without creating inflation” may be around 4 percent, said Subir Lall, the organization’s mission chief to South Korea.
Inflation Target
The economy expanded 7.6 percent in the first half and will grow 5.9 percent this year, before cooling to a 4.5 percent pace in 2011, according to Bank of Korea figures. Inflation was 2.6 percent in August, within the monetary authority’s target of between 2 percent to 4 percent on average through 2012. It will accelerate to 3.2 percent in the fourth quarter, Kim said today.
“The Bank of Korea tends to keep on the sidelines during September around the time of the Chusok Full Moon Festival -- there has not been a change in rates in a September since 2001,” Brian Jackson, senior emerging markets strategist at Royal Bank of Canada in Hong Kong, said in a note. He predicted the benchmark will increase to 2.75 percent by year-end.
The expected inflation rate over the next year climbed to 3.2 percent in August, rising for a second month, according to a central bank survey. Producer prices gained at the slowest pace in five months in August, advancing 3.1 percent.
The government said Sept. 2 it will take “pre-emptive action” to limit price growth and inflation expectations, including boosting food supplies.
U.S. Outlook
Uncertainty and jitters over the global economy are persisting and require close monitoring, Finance Minister Yoon Jeung Hyun said in Gwacheon today.
The Reserve Bank of Australia said this week growth in the U.S. looked “weaker” after extending its pause in raising interest rates. The Bank of Japan cited “uncertainty about the future, especially for the U.S.” Governor Masaaki Shirakawa said he is prepared to take “policy action in a timely and appropriate manner” if needed.
While the economy ministry estimates South Korea’s trade surplus will reach $32 billion this year, export gains may begin to slow in the fourth quarter amid signs the won is set to rise, Cho Hwan Eik, president of Korea Trade-Investment Promotion Agency, said in an interview in Seoul on Aug. 31.
“The most critical factor is whether the won remains at the current level,” Cho said. “We’re not in a safe zone given that global economic turbulence will continue for quite a while.”
Won strength could hurt export competitiveness at companies including Samsung Electronics Co., Asia’s biggest maker of semiconductors, flat screens and mobile phones, and Hyundai Motor Co., the country’s largest automaker.
Governor Kim also has to grapple with record household debt levels and home prices that are sliding after a decade-long boom. The government eased mortgage lending rules and extended tax breaks last month to draw buyers back to the property market.
-- With assistance from Michael Munoz in Hong Kong. Editors: Sunil Jagtiani, Nerys Avery
To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net; William Sim in Seoul at wsim2@bloomberg.net.
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