Bank of Korea Holds Rates as Government Eyes Stimulus Steps

The Bank of Korea left the benchmark interest rate unchanged as a new government considers more fiscal support for Asia’s fourth-largest economy.

Governor Kim Choong Soo and his board held the seven-day repurchase rate at 2.75 percent after a 25 basis-point cut in October, the central bank said in a statement in Seoul today. Twelve of 16 economists surveyed by Bloomberg News predicted the decision while the rest forecast a reduction.

President Park Geun Hye, who took office on Feb. 25, is grappling with North Korean tensions, yen weakness that aids export rivals in Japan, and the drag on consumption from elevated household debt. Her nominee for finance minister, Hyun Oh Seok, told lawmakers yesterday that “short-term policy support” is needed for the economy.

“Policy should remain focused on risk management rather than the acceleration of growth, given flare-ups in geopolitical tensions with North Korea, yen movements and the high level of household debt,” Kwon Young Sun, a Hong Kong-based economist at Nomura International Ltd., said before the announcement. The economy may “grow modestly on improved global demand and the government’s targeted stimulus measures.”

Officials are concerned at the risk that growth will fail to recover to closer to its potential rate, estimated at 3.8 percent by Kim, after a 2 percent expansion last year was the weakest since the global recession.

‘Modest Improvement’

The economy is “expected to maintain its trend of modest improvement” in coming months, the BOK said in a statement after the decision. At the same time, fiscal tightening in advanced nations and changes in the yen’s value pose risks, the central bank said. A “moderate recovery” has been sustained since the fourth quarter of last year, although the improvement has been “faltering slightly,” it said.

“We may change our economic forecast next month but the growth path projected in January is still valid,” Governor Kim told reporters today. “Some data showed improvement in February from January. The current quarter will see stronger growth than the fourth quarter of last year.”

Some investors had expected a rate cut, as signaled by a three-year bond yield falling to a record low this week. The Kospi index of stocks extended losses after the decision, falling as much as 1.1 percent percent in Seoul. The yield on a 2.75 percent bond due December 2015 rose 2 basis points to 2.62 percent after the decision, according to prices from Korea Exchange Inc.

Abundant Liquidity

Governor Kim said in an interview last month that an improved global outlook increased the odds of exceeding the central bank’s 2.8 percent forecast for South Korea’s growth this year, and liquidity was “abundant.”

While tensions with North Korea have pared the won’s gains, the currency is still up about 24 percent against the yen in the past six months, hindering South Korea’s exporters of automobiles and electronics.

The government is already delivering a fiscal boost by allocating 72 percent of budget spending for 2013 to the first half.

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