Bank of Korea Leaves Key Interest Rate Unchanged as It Weighs Growth Risks

The Bank of Korea kept interest rates unchanged after two increases this year, opting to see how rising oil prices and Japan’s earthquake will affect economic growth amid accelerating inflation.

Governor Kim Choong Soo left the benchmark seven-day repurchase rate at 3 percent after boosting it by a quarter of percentage point each in January and March, the central bank said in a statement in Seoul today. The decision was predicted by 11 of 12 economists surveyed by Bloomberg News.

South Korean policy makers are struggling to tame inflation without choking off an export-led recovery. The central bank may soon resume raising interest rates and allow gains by the won after costlier oil and food caused consumer-price gains to exceed the central bank’s 4 percent ceiling every month so far this year. Kim said the bank wants to “normalize” rates.

“We expect they will raise the rate in May or June,” Kwon Goohoon, Seoul-based economist at Goldman Sachs Group Inc., said in an interview with Bloomberg Television. “The Korean won is likely to play -- it has been playing -- a very important role in reducing inflation and inflationary expectations.”

Kwon said he expects the central bank to increase interest rates by half a percentage point more this year.

The won dropped 0.85 percent to 1,093.55 per dollar as of 2:35 p.m. in Seoul, according to the data compiled by Bloomberg, while the Kospi stock index fell 1.36 percent.

‘Normalize’ Rates

“We’re determined to normalize interest rates,” Kim, the central bank governor, told reporters today. “We will move ahead neither too slowly nor too fast, and in a forward-looking manner, as we’re recovering from a crisis.”

Kim also said the policy decision today wasn’t unanimous, and that core inflation may exceed consumer inflation by year- end. Core inflation, which excludes seasonal or exceptional price moves, was at 3.3 percent in March.

The governor’s remark on core inflation “implies that the Bank of Korea remains mindful of underlying inflation pressures,” Frederic Neumann, a Hong Kong-based economist at HSBC Holdings Plc, said in a report after the rate decision.

The nation’s consumer inflation will likely ease from this month as food prices are expected to stabilize because of cold weather and an outbreak of foot-and-mouth disease, Finance Minister Yoon Jeung Hyun said last week.

Consumer Confidence

Domestic private consumption may slow as consumer confidence fell to the lowest level in almost two years in March, the finance ministry said in its latest monthly economic report last week. It also said the economy is facing “higher uncertainty” due to volatile oil prices, the effects of Japan’s earthquake last month, and Europe’s debt crisis.

Strengthening exports and recovering domestic demand last year drove the fastest growth since 2002 in Asia’s fourth- largest economy, stoking inflation pressure and prompting the central bank to raise interest rate from a record-low 2 percent since early July.

President Lee Myung Bak declared “war” on inflation in January, saying it must be contained at 3 percent, a level exceeded in each of the past seven months.

“It will be just a brief pause” in increasing interest rates “as inflation pressures are still intolerably high,” Park Sang Hyun, chief economist at HI Investment & Securities Co. in Seoul, said before the announcement.

Accelerating Inflation

Inflation has accelerated since rates were increased in January, with consumer price gains reaching a 29-month high in March and breaching the central bank’s target of average inflation between 2 percent to 4 percent through 2012. The monetary authority predicts inflation will accelerate to 3.5 percent this year from 2.9 percent in 2010.

High inflation is likely to persist in the coming months, the Bank of Korea said in a statement today. The bank said it will put a greater emphasis on “ensuring that the basis for price stability is firmly anchored while the economy continues its sound growth.”

The central bank expects 4.5 percent growth this year, a prediction that may be revised tomorrow. Last year, the economy grew 6.2 percent. Exports jumped 30.3 percent to record $48.6 billion last month.

The International Monetary Fund projected yesterday that South Korea’s consumer inflation will accelerate to 4.5 percent this year. The IMF forecast the nation’s economic growth will slow to 4.2 percent next year from 4.5 percent this year.

To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net;

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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