Bank of Korea Holds Rate for Eighth Month as Growth Slows on Europe Crisis

The Bank of Korea held off raising borrowing costs for an eighth straight month as the economy slowed and exports declined due to the European debt crisis.

Governor Kim Choong Soo and his board kept the benchmark seven-day repurchase rate unchanged at 3.25 percent, the central bank said in a statement in Seoul today. The unanimous decision was predicted by 18 of 19 economists surveyed by Bloomberg News.

Policy makers in export-driven Asian countries have relied on monetary or fiscal stimulus to weather the European debt crisis. Australia unexpectedly held off cutting interest rates this week on signs of improvements in the U.S. and Europe. Kim has signaled that rates will have to rise at some point and said today that inflation expectations are high and the central bank is “on alert.”

“The central bank will likely stay on hold next month while weighing the risk of growth and inflation,” said Park Sang Hyun, chief economist at HI Investment & Securities Co. in Seoul. “Growth momentum is apparently weakening with tepid domestic demand and falling exports while inflation pressures persist. We will see clearer signs of where the economy is headed in one or two months.”

The Kospi share index rose 0.5 percent at the close in Seoul. The won was little changed against the U.S. dollar, according to data compiled by Bloomberg.

Inflation Alert

U.S. growth, “robust” indicators from China and progress in taming Europe’s debt crisis encouraged Australian policy makers to keep rates on hold this week, the central bank indicated. Over the past three weeks, Sri Lanka raised rates, Thailand cut, and Malaysia and New Zealand made no change. India also paused, while cutting reserve requirements for banks.

“Although our economy is in a difficult situation, it will return to a long-term growth trend,” Kim said. “We will stay on alert to price gains as inflation expectations are still considerably high.”

In a Jan. 17 interview, Kim said rates remained “accommodative” and the discrepancy with a more desirable level “cannot be maintained for a long period of time.”

Asia’s fourth-largest economy, which grew the least last quarter in two years, is getting some fiscal support from plans for 60 percent of this year’s government spending to occur in the first six months. The central bank and government forecast 3.7 percent growth this year after a 3.6 percent gain last year.

Overseas Shipments

“The upturn in the overall trend in shipments will remain intact over the next few months,” Wai Ho Leong, a senior regional economist at Barclays Capital in Singapore, said. Key supports are the upturn in the activity indicators of Korea’s export markets, including the revival in the U.S. ISM new orders index and the January reading for the China NBS PMI, he said.

Overseas shipments, equivalent to half of the economy, unexpectedly fell 6.6 percent in January from a year earlier, the first drop in more than two years, according to a government report on Feb. 1. Hyundai Motor Co., South Korea’s largest automaker, reported a jump in fourth-quarter profit, fueled by U.S. demand.

Last month, the International Monetary Fund lowered its estimate for global growth this year to 3.3 percent from a September forecast of 4 percent, warning that the European debt crisis threatens to derail the world economy. The euro area may enter a “mild recession” in 2012 as it shrinks 0.5 percent. South Korea’s growth forecast for this year was cut to 3.5 percent from 4.4 percent.

Price Pressures

A dip in the Korean inflation rate to 3.4 percent in January was largely because of a high year-earlier level, the central bank said in a report to the National Assembly this week. Price pressures will likely persist on elevated inflation expectations and unstable oil costs, it said. The expected inflation rate over the next year was 4.1 percent in January, according to a BOK survey last month.

“The respite is likely to be temporary, given that inflation expectations remain unanchored,” Leong at Barclays said. There are “significant upside risks” for services costs and core inflation given the public transport fare increases and the possibility of another boost to electricity tariffs.

To contact the reporter 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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