Bank of Korea keeps rate at record low 2 percent

Thursday, June 10, 2010
SEOUL, South Korea – South Korea's central bank left its key interest rate at a record low Thursday as worries persist over the health of the global economy and Europe's debt woes.
The Bank of Korea announced it was keeping its benchmark seven-day repurchase rate unchanged at 2 percent for the 16th straight month. The decision was widely expected.
The bank's monetary policy committee said in a statement that government debt problems in Europe may destabilize international financial markets at any time. 'This could exercise an influence on the recovering trend in the global economy,' it said.
The committee also signaled it would keep the key rate low and offered no concrete sign of when a hike might occur, though did express concern over inflation, saying consumer prices have 'accelerated slightly' and upward pressure was expected to continue.
The BOK slashed the rate six times from October 2008 to help battle the global financial meltdown. It lowered the borrowing cost to its current level in February of 2009.
Asia's fourth-largest economy has recorded five straight quarters of growth after contracting amid the worldwide downturn.
The bank announced last week that South Korea's economy grew faster than originally estimated in the first quarter, growing 2.1 percent from the previous three-month period.
The government's statistics agency, meanwhile, said Wednesday that the unemployment rate fell sharply in May to a seven-month low of 3.2 percent.
Economists have broadly expected the bank to begin gradually hiking the rate during the third quarter. The government has for months expressed concerns over the outlook for the recovery if borrowing costs are raised too soon.
Kwon Goohoon, economist at Goldman Sachs in Seoul, wrote Thursday that 'given the prospects of slowdown in EU growth' the BOK is now likely to raise its key rate just once by 0.25 percentage point, rather than twice, in the second half of 2010.
The BOK expects South Korea's economy to expand 5.2 percent in 2010, compared with growth of 0.2 percent last year. If achieved, such a figure would be the best in four years.
The rate decision comes amid worries over prospects for the global economy due to sovereign debt problems in Europe. The European Union has tried to restore confidence with a massive financial rescue package, while some member countries have moved to impose spending cuts.
Some central banks, including those in Australia, Norway and Canada, have moved to raise interest rates. Brazil hiked its key rate to 10.25 percent on Wednesday from 9.5 percent to try and cool the country's red-hot economy, which grew 9 percent in the first quarter.
Despite South Korea's solid recovery, its financial markets have suffered along with others amid the European uncertainty and tensions with rival North Korea.
Financial markets were narrowly mixed Thursday after the rate decision. Seoul's benchmark stock index rose 0.3 percent to close at 1,651.70.
The won fell 0.2 percent to 1,251 against the dollar. The South Korean currency last month slid to its lowest level against the greenback since last July.