Bank of Korea Stays on Hold for 5th Month to Support Rebound

The Bank of Korea kept its benchmark interest rate unchanged for a fifth month, seeking to bolster a rebound that the International Monetary Fund said this week will be slower than previously forecast.

Governor Kim Choong Soo and his board kept the seven-day repurchase rate at 2.5 percent after a cut in May, the central bank said in a statement in Seoul today. All 18 economists surveyed by Bloomberg News predicted the outcome.

With the lowest inflation since 1999, the BOK can afford to support growth by holding off from raising interest rates. While indicators including industrial output show momentum, a U.S. budget standoff is creating uncertainty for South Korea’s economy, Finance Minister Hyun Oh Seok said this week.

“Governor Kim will likely retire next March with the rate at the current level of 2.5 percent and it may take some time for his successor to raise it,” Park Sang Hyun, chief economist at HI Investment and Securities Co. in Seoul, said before the announcement.

President Park Geun Hye introduced a 17.3 trillion won ($16 billion) extra budget in May, the same month Governor Kim delivered a surprise interest rate cut, seeking to revive an economy that grew 2 percent in 2012, the slowest in three years.

Growth Risks

The won was little changed after the decision, and was up 0.1 percent at 1076.20 per the dollar at 10:30 a.m. in Seoul. The Kospi index gained 0.2 percent.

The economy expanded 1.1 percent in the second quarter from the preceding three months, the most in more than two years. Inflation eased to 0.8 percent last month, staying below the BOK’s target range of 2.5 percent to 3.5 percent for more than a year.

The BOK’s decision to stay on hold was expected given that growth remains below the economy’s potential, said Ronald Man, Hong Kong-based economist at HSBC Holdings Plc. With a gradual recovery likely to be maintained, the next move will be a 25 basis point rate increase in the third quarter next year, even as record household debt and sluggish property prices pose risks to domestic demand, Man said.

“Eyes will be on economic data from key export partners such as China, as Korea’s recovery will likely be export-led,” said Man.

In July, the BOK forecast 4 percent growth next year after 2.8 percent expansion this year.

The IMF this week kept its estimate for a 2.8 percent expansion this year in South Korea’s economy, while lowering its growth forecast for next year to 3.7 percent from 3.9 percent, as it cut its global outlook and warned that a U.S. government default could “seriously damage” the world economy.

The BOK will increase its benchmark rate to 2.75 percent in the third quarter of next year, according to the median forecast in a survey of 22 economists by Bloomberg News.

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