Bank of Korea Holds Rate for Sixth Month as Europe Crisis Imperils Growth

The Bank of Korea refrained from raising borrowing costs for a sixth straight month as the deepening European debt crisis and global slowdown imperil exports and growth in Asia’s fourth-biggest economy.

Governor Kim Choong Soo and his board kept the benchmark seven-day repurchase rate unchanged at 3.25 percent, saying in a statement in Seoul that “in terms of the upside and downside risks to the future growth path, the downside dominates.”

“Downside risks to growth are high, due mostly to the sovereign debt crisis in Europe and to the possibility of slumps in major country economies and the unrest in international financial markets continuing,” the central bank said in the statement released in Seoul. Monetary policy will be conducted “so as to firmly anchor the basis for price stability amid the continuing sound growth of the economy.”

The decision to hold rates aligns South Korea with efforts in countries ranging from China to Australia to shield Asia- Pacific economies from Europe’s deepening fiscal turmoil. Tomorrow the Bank of Korea may lower its growth outlook for this year and next because of the global slowdown, Lee Jong Kyu, deputy director-general at the bank, said in an interview in Bali on Dec. 2.

“Europe is a really big threat to growth, prompting global re-easing,” Yoon Yeo Sam, a fixed-income analyst at Daewoo Securities Co. (006800) in Seoul, said before the announcement. “The Bank of Korea will follow suit and cut rates in the second quarter if exports shrink.”

’Growing Danger’

The won dropped 0.5 percent to 1,131.40 per dollar as of 11 a.m. in Seoul, according to data compiled by Bloomberg. The Kospi stock index fell 1 percent.

Economic growth in emerging East Asia will continue to moderate into 2012 as escalating sovereign-debt problems in Europe and an anemic U.S. economy raise the specter of a deep downturn, the Asian Development Bank said in its semi-annual report on Dec. 6.

“The turmoil emanating from Europe poses a growing danger to trade and finance within emerging East Asia; so the region’s policy makers must be prepared to act promptly, decisively and collectively to counter what could be an extended global economic slowdown,” Iwan J. Azis, the head of ADB’s Office of Regional Economic Integration, said in the report.

Australia’s central bank cut its overnight cash-rate target by a quarter percentage point to 4.25 percent this week, saying “the likelihood of a further material slowing in global growth has increased.”

Rates on Hold

New Zealand’s central bank earlier today left its benchmark rate at a record-low 2.5 percent, citing a decline in business confidence and a “softening in international economic activity.” Thailand lowered borrowing costs on Nov. 30, while China reduced lenders’ reserve requirements for the first time since 2008.

“After the likely negative GDP growth and slowing inflation in the first quarter, we expect policy makers to enact a supplementary budget and cut interest rates,” Kwon Young Sun, a Hong Kong-based economist at Nomura Holdings Inc., said. “We forecast the BOK to cut policy rates by 25 basis points each in April and July 2012 to 2.75 percent.”

Finance Minister Bahk Jae Wan said on Dec. 6 that the nation’s economy may slow due to signs of global weakness and a decline in international trade.

Growth Outlook Cut

South Korea’s economy will grow by 3.8 percent in 2012, the Organization for Economic Cooperation and Development forecast last week. That’s lower than the Bank of Korea’s projection in July of a 4.6 percent expansion next year.

Overseas shipments continue to drive the economy, expanding a more-than-expected 13.8 percent in November, according to government data released Dec. 1. Industrial production unexpectedly fell 0.7 percent in October from September, the fifth decline this year.

Samsung Electronics Co.’s third-quarter net profit decreased 23 percent from a year earlier as computer-memory chip and panel sales slumped. LG Electronics Inc. (066570) reported a wider- than-estimated quarterly loss as mobile-phone sales missed forecasts and earnings fell at its flat-panel unit.

Consumer prices rose 4.2 percent from a year earlier in November, accelerating to a three-month high and breaching the central bank’s target limit again, a government report showed on Dec. 1.

“As regards consumer prices, their uptrend will slow due largely to the easing of upward pressures on international commodity prices,” the central bank said today. “The fall in core inflation is, meanwhile, expected to be limited, affected by inflation expectations.”

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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