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Bank of Korea Holds Rate Following Surprise Cut in July

Bank of Korea Governor Kim Choong Soo
Kim Choong Soo, governor of the Bank of Korea. Source: Yonhap News via Bloomberg

The Bank of Korea kept borrowing costs at a 14-month low after a surprise cut in July as policy makers await more data to gauge the fallout from Europe’s sovereign debt crisis.

Governor Kim Choong Soo and his board left the benchmark seven-day repurchase rate unchanged at 3 percent. The decision was unanimous, Kim told reporters, and was predicted by 10 of 16 economists surveyed by Bloomberg News, while the rest forecast a 25 basis point reduction.

The BOK has come under pressure to shore up growth in Asia’s fourth-largest economy after gross domestic product expanded at the slowest pace in almost three years last quarter and inflation eased to a 12-year low. Finance Minister Bahk Jae Wan said this week that Europe’s woes are causing a global contraction, a view bolstered by the Bank of England paring forecasts for the economy yesterday and German industrial production falling more than expected.

“The rate pause today raises the possibility of a cut next month,” said Sun Yoo, an economist at Woori Investment & Securities Co. in Seoul. “There is a shared understanding that the European fiscal crisis will be a lasting one and that a slowdown in the domestic economy needs some policy support.”

The won reversed a decline after the decision, rising 0.1 percent to 1,127.43 at 10:40 a.m. in Seoul and the benchmark Kospi stock index rose for a fourth day, gaining 1 percent.

‘Slackening’ Growth

“Growth momentum, as reflected in domestic economic activity, appears to be slackening, on the sluggishness of both exports and domestic demand stemming from mounting external uncertainties,” the BOK said in an English-language statement today after the decision.

The BOK cut interest rates from 5.25 percent to a record-low 2 percent between October 2008 and February 2009 to counter fallout from the global financial crisis sparked by the collapse of Lehman Brothers Holdings Inc. Then it raised the rate to 3.25 percent over a year starting in July 2010, as inflation breached its target limit of 4 percent and household debt swelled to a record.

“Even if the BOK opts to stay on the sidelines, it is unlikely to remain there for long,” said Sukhy Ubhi, an economist at Capital Economics Ltd. in London. “The economy grew at a sluggish pace and growth is unlikely to fare much better in the third quarter.”

Indonesia, Japan

Indonesia also decides monetary policy today and will probably keep interest rates unchanged for a sixth month, according to 25 of 26 economists in a Bloomberg survey. The Bank of Japan today may refrain from adding monetary stimulus for a fourth time, according to all 22 analysts polled. The State Bank of Pakistan is scheduled to decide on borrowing costs tomorrow.

Australia’s central bank kept interest rates unchanged at a developed-world high this week, citing a domestic expansion that’s weathering a global slowdown. A U.S. government report last week showing the economy added more jobs than forecast in July damped speculation the Federal Reserve will resort to a third round of asset purchases.

Should South Korean central bankers reduce further, they have “limited room,” said Kim Nam Hyun, a Seoul-based fixed income analyst at Eugene Investment & Futures. The 2 percent low reached in 2009 was the lowest policy makers could go without sparking unwanted consequences such as foreign-capital flight, he said.

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