Bank of Korea Holds Rate for 11th Month on European Woes

Bank of Korea Holds Rate for 11th Month Amid European Woes
Kim Choong Soo, governor of the Bank of Korea, hits a gavel as he starts a monetary policy meeting in Feb. at the central bank's headquarters in Seoul. Source: Yonhap News via Bloomberg

The Bank of Korea held off from altering borrowing costs for an 11th straight month after inflation eased and policy makers cut their forecasts for economic growth.

Governor Kim Choong Soo and his board kept the benchmark seven-day repurchase rate at 3.25 percent as predicted by all 17 economists surveyed by Bloomberg News.

Europe’s financial turmoil is reigniting on the second anniversary of policy makers’ first attempt to prevent Greece’s fiscal woes from turning toxic. While South Korea’s economy expanded at the fastest pace in a year last quarter, Kim said today that growth has slowed on weakness in consumption and investment.

“The BOK will likely stay put for an extended time,” said Kim Nam Hyun, a Seoul-based fixed income analyst at Eugene Investment & Futures. “That’s the best thing it can do now to support growth and contain inflation at the same time.”

Kim said today’s decision was unanimous and officials didn’t discuss a cut as they seek to “normalize” rates, indicating they don’t yet see Europe’s woes derailing growth. Europe is in a “mild recession” and the global economy will have a modest recovery, Kim said.

Government bonds declined after Kim’s remarks, with the yield on the benchmark three-year bond climbing four basis points, or 0.04 percentage point, to 3.41 percent as of 11:48 a.m. in Seoul, Korea Exchange prices show. The won held a decline, weakening 0.2 percent to 1,142.38 per dollar, according to data compiled by Bloomberg.

Moderate Growth

“The Korean economy is expected to maintain a moderate trend of growth for the time being, influenced by the global economic slowdown particularly in the euro area,” the BOK said in an English-language statement. “In terms of upside and downside risks to the future growth path, the downside remain significant.”

Monetary policy will focus on stabilizing consumer-price inflation at the midpoint of the target of between 2 percent and 4 percent over the medium-term, according to the statement. Policy makers cited elevated inflation expectations and oil prices as risks.

Separately, the government said today that it will ease lending regulations for people purchasing homes in three parts of southern Seoul, the latest step to support the nation’s housing market after declines in prices and sales.

European Worries

The 17-nation euro area is on the verge of losing one of its members, with more than 50 percent of investors predicting an exit this year, according to the Bloomberg Global Poll. As Greece faces political paralysis and voters balk at austerity, 57 percent of 1,253 investors, analysts and traders who are Bloomberg subscribers said at least one country will abandon the euro by year-end.

The Bank of Korea reduced its 2012 growth forecast for the country to 3.5 percent from 3.7 percent on April 16.

South Korea should raise interest rates once economic uncertainty ebbs and allow the won to appreciate to counter inflation pressures, the Organization for Economic Cooperation and Development recommended on April 26. The Paris-based organization projected that Asia’s fourth-largest economy will expand 3.5 percent this year and about 4.3 percent in 2013.

“Korea is very well prepared to resist or face any unexpected shock” stemming from global uncertainty, Angel Gurria, the secretary general of the OECD, said in Seoul.

Inflation moderated to a 21-month low of 2.5 percent in April. Consumer-price gains were trimmed by government subsidies for childcare and an expanded free school lunch program starting in March. Producer-price inflation cooled to the slowest pace in 26 months.

Consumer Confidence

In contrast with the turmoil in Europe, consumer confidence in South Korea rose to the highest level in almost a year last month while manufacturers’ confidence for May was also elevated.

Hyundai Motor Co., South Korea’s largest carmaker, reported last month that net income climbed 31 percent in the first quarter from a year earlier, exceeding analysts’ estimates, helped by sales of the Elantra sedan and i20 subcompact in Europe and the U.S.

Samsung Electronics Co. posted a record operating profit in the first quarter as gains from selling phones and TVs helped mask a slump in earnings at the chip business.

Today’s rate decision was the first for four new board members, who joined the Bank of Korea’s policy-making committee late April. They look “more dovish” than their predecessors, judging from their backgrounds, according to Kwon Young Sun, a Hong Kong-based economist at Nomura Holdings Inc.

The new monetary policy makers are former Hyundai Motor Co. President Chung Soon Won, Seoul National University professor Moon Woo Sik, former Planning and Budget Ministry official Chung Hae Bang, and Yonsei University professor Ha Sung Keun.

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