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Bank of Korea Unexpectedly Holds Rates After Stimulus

The Bank of Korea unexpectedly held borrowing costs in its second surprise decision this year as it opted to preserve policy room in the event of a deeper slowdown.

Governor Kim Choong Soo and his board kept the benchmark seven-day repurchase rate at 3 percent after a cut in July, the central bank said in a statement today in Seoul. The unanimous stance was predicted by one of 16 economists surveyed by Bloomberg News, while the rest forecast a 25 basis point reduction.

South Korean policy makers face pressure to add stimulus as Europe’s debt crisis curbs exports, while weighing signs of resilience such as unemployment at an eight-month low. The finance ministry announced 5.9 trillion won ($5.2 billion) of spending and tax relief this week and the BOK today said it will boost its special loan program for small businesses.

“The Bank of Korea needs to preserve its policy power because Europe’s fiscal crisis is a long-term fight,” said Kwon Young Sun, a Hong Kong-based economist at Nomura International Ltd. “It also has to manage expectations for the rest of the year and an interval of three months is more appropriate than two months after a cut in July.”

The won fell 0.2 percent to 1,128.35 per dollar at 2:44 p.m. in Seoul, according to data compiled by Bloomberg. The Kospi index of stocks fell 0.6 percent, while South Korea’s government bonds declined, pushing the three-year yield up by the most in four weeks.

Support Measures

The central bank meeting follows the government’s Sept. 10 efforts to spur growth ahead of a December election to replace President Lee Myung Bak. The measures, which include spending and tax incentives to encourage the purchase of new cars and homes, add to 8.5 trillion won of support announced in June.

“Growth momentum, as reflected in domestic economic activity, appears to be slackening,” the BOK said today in a statement. The government’s expanded spending is “thought likely to contribute in some part to preventing any deepening of the economic downturn.”

The central bank today also said it would provide 1.5 trillion won to help small business owners refinance debt at a lower interest rate. The decision to refrain from altering borrowing costs follows a surprise 25 basis point reduction on July 12, a move predicted by two of 16 economists surveyed by Bloomberg News at the time.

Against Expectations

“This mismatch is undesirable not only for the market but also for policy makers,” said Kong Dong Rak, a fixed-income analyst at Taurus Investment & Securities Co. in Seoul. “It could bring unwanted consequences.”

South Korea’s gross domestic product rose 2.3 percent in the second quarter from a year earlier, the slowest pace in almost three years. Exports fell 6.2 percent in August, the second straight month of declines in a country where overseas sales make up about half the economy.

Waning global growth has hit the country’s largest companies. Hyundai Motor Co. and Kia Motors Corp. together sold 11 percent more vehicles in the U.S. in August than a year earlier, less than the 19 percent average gain of five analysts’ estimates.

“It is a very disappointing decision,” Frances Cheung, a senior strategist at Credit Agricole CIB in Hong Kong, said of the BOK. “I don’t see any strong reason for staying put, with both domestic and external demand weak while inflation has been tame.”

The BOK may be pausing to assess the impact of the July rate cut on the economy, said Wai Ho Leong, a senior regional economist at Barclays Plc in Singapore. Fitch Ratings upgraded the country’s rating on Sept. 6, 10 days after a similar move by Moody’s Investors Service, with both companies citing the country’s room to respond to shocks.

The Bank of Korea will probably trim its 2012 growth forecast to 2.7 percent from 3 percent when it releases a review in October, said Nomura’s Kwon.

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