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Bank of Korea base rate left at 2% for 6th month

Governor’s remarks suggest policy change will be slow

Aug 12,2009

The Bank of Korea yesterday kept its key interest rate, which it calls the base rate, unchanged for the sixth straight month, as widely expected.

BOK Governor Lee Seong-tae said the bank would “closely watch how the economy goes in the third quarter,” suggesting that it could change its monetary policy as early as in the fourth quarter, depending on the economy’s performance.

The BOK maintained the base rate at a record-low 2 percent at its monthly monetary policy meeting yesterday. Between October and February, the bank cut the rate aggressively by a total of 3.25 percentage points in efforts to stimulate the economy.

Lee told the press after the meeting that the bank would keep the current loose monetary policy for a while, due to “uncertainties” in major developed economies and on the domestic job market.

But he said gross domestic product growth in the second quarter could turn out to have been higher than the preliminary estimate of 2.3 percent released in late July and that the gradual improvement of the private sector, which started in the second quarter, would likely continue in the second half of this year.

“The economy will be able to continue positive on-quarter growth in the latter half of this year, though the influence of government spending will weaken slightly,” Lee said, adding that the bank would closely monitor economic conditions in the third quarter.

He also expressed concerns about hikes in home prices in some parts of the Seoul metropolitan area in early July and the rise in new mortgages at banks. “We are watching these with wariness,” he said, pointing out that home prices did not fall as sharply during the financial crisis in Korea as they did in other countries.

Lee said annualized inflation “would not exceed 3 percent this year,” though in the second half inflation will be higher than the first, with international prices of crude oil and other raw materials increasing.

Market interest rates declined yesterday after the announcement. “The recent rises in market interest rates are somewhat early,” Lee said.

The yield on the benchmark three-year Treasury fell by 0.06 percentage point from Monday to 4.41 percent.

“Most market observers had expected the BOK to maintain the key rate this time but expected Governor Lee to make more positive remarks about a future conversion in its monetary policy,” said Jason Woo, deputy head of trading at BNP Paribas’ Korean unit.

“But he was more cautious than expected. Now the chances of a rate increase before the end of this year are lower, though they still exist.”

Daniel Melser, a senior economist at Moody’s Economy.com, was more optimistic. He wrote in a note, “There is a growing chance of a rate hike in the not-too-distant future. But there is no urgent need to raise rates. The most likely course of action is that the Bank of Korea will wait until the economy fully recovers, and in particular, they will wait until the unemployment rate stops increasing. This is likely to be sometime in the first half of next year.”



By Moon So-young [symoon@joongang.co.kr]


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