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Bank of Korea Holds Rates After N. Korea’s Rocket Launch

Bank of Korea Governor Kim Choong Soo
Kim Choong Soo, governor of the Bank of Korea. Photographer: SeongJoon Cho/Bloomberg

The Bank of Korea held borrowing costs unchanged before next week’s presidential election and after North Korea launched a rocket in defiance of international sanctions yesterday.

Governor Kim Choong Soo and his board kept the benchmark seven-day repurchase rate at 2.75 percent after 25 basis-point cuts in July and October, the central bank said in a statement in Seoul today. Fourteen of 15 economists surveyed by Bloomberg News predicted the decision and one forecast a 25 basis-point reduction.

South Korea’s economic data has given mixed signals and a rapid rebound in growth is “unlikely,” Kim told reporters today after the bank’s unanimous decision. At the same time, the nation is poised for a “moderate” export-led recovery and inflation will remain low, the BOK said in a statement, bolstering the view that policy makers will remain on hold.

“The economy is still weak but not worsening,” said Yoon Yeo Sam, a fixed-income analyst at Daewoo Securities Co. in Seoul. “The Bank of Korea will likely hold the rate throughout next year, unless there is a clear and strong signal of economic recovery.”

South Korea’s won appreciated 0.3 percent to 1,071.75 per dollar as of 12:38 p.m. in Seoul, according to data compiled by Bloomberg. The currency earlier rose to 1,071.08, a 15-month high. The Kospi index of shares gained 0.6 percent after closing yesterday at the highest level since Oct. 9.

‘No Reason’

“The Bank of Korea has no reason to cut rates further unless the won continues to appreciate to levels that invite hot money inflows,” said Park Jong Youn, a fixed-income analyst at Woori Investment & Securities in Seoul. “I expect no change in interest rates until the end of next year.”

Much of the outlook for South Korea’s economy depends on the strength of a recovery in China, said Ronald Man, a Hong Kong-based analyst at HSBC Holdings Plc. China’s new yuan loans trailed forecasts last month, while industrial output and retail sales exceeded forecasts.

“Rising production and stabilizing manufacturing conditions show that Korea remains on track for a gradual recovery,” Man said. “This, however, requires the upward momentum in China to be sustained, as Korea’s growth in 2013 will likely be export led.”

Growth Target

South Korea is unlikely to meet the central bank’s growth estimate of 2.4 percent for this year, Bank of Korea Director Jung Yung Taek said on Dec. 6. The economy expanded 1.5 percent in the third quarter from a year earlier, the slowest since 2009. The central bank projects 3.2 percent growth for 2013.

President Lee Myung Bak, whose five-year term ends in February, has resisted pressure from lawmakers for an extra budget to support growth, submitting a 2013 budget that targets a fiscal deficit equal to 0.3 percent of gross domestic product, a six-year low. Both ruling-party candidate Park Geun Hye and opposition nominee Moon Jae In have promised to boost social spending and increase aid to lower-income families.

While the country’s exports rose for a second month in November, consumer confidence was below 100 for a fourth month, a level seen during 2009, when the nation was recovering from the worst of the financial crisis. An index measuring expectations of manufacturers for December fell to the lowest since April 2009, the Bank of Korea said last month.

‘Preemptive’ Measures

South Korea’s Finance Minister Bahk Jae Wan said yesterday that any turmoil in financial markets after North Korea’s rocket launch would be limited. The government is ready to take “speedy and preemptive” measures if needed, Bahk said.

The North Korean test deployed an object that appeared to achieve orbit, the North America Aerospace Defense Command said in a statement yesterday. The development followed a failed rocket test in April under new leader Kim Jong Un.

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