Bank of Korea keeps rate unchanged as it weighs growth risks

April 13, 2011 - 0:0

The Bank of Korea kept interest rates unchanged after two increases this year, opting to see how rising oil prices and Japan’s earthquake will affect economic growth amid accelerating inflation.

Governor Kim Choong Soo left the benchmark seven-day repurchase rate at 3 percent after boosting it by a quarter of percentage point each in January and March, the central bank said in a statement in Seoul on Tuesday. The decision was predicted by 11 of 12 economists surveyed by Bloomberg News.
South Korean policy makers are struggling to tame inflation without choking off an export-led recovery. The central bank may soon resume raising interest rates and allow gains by the won after costlier oil and food caused consumer-price gains to exceed the central bank’s 4 percent ceiling every month so far this year. Kim said the bank wants to “normalize” rates.
“We expect they will raise the rate in May or June,” Kwon Goohoon, Seoul-based economist at Goldman Sachs Group Inc., said in an interview with Bloomberg Television. “The Korean won is likely to play -- it has been playing -- a very important role in reducing inflation and inflationary expectations.”
Kwon said he expects the central bank to increase interest rates by half a percentage point more this year.
The won dropped 0.85 percent to 1,093.55 per dollar as of 2:35 p.m. in Seoul, according to the data compiled by Bloomberg, while the Kospi stock index fell 1.36 percent.
-----------------‘Normalize’ rates
“We’re determined to normalize interest rates,” Kim, the central bank governor, told reporters on Tuesday. “We will move ahead neither too slowly nor too fast, and in a forward-looking manner, as we’re recovering from a crisis.”
Kim also said the policy decision wasn’t unanimous, and that core inflation may exceed consumer inflation by year- end. Core inflation, which excludes seasonal or exceptional price moves, was at 3.3 percent in March.
The governor’s remark on core inflation “implies that the Bank of Korea remains mindful of underlying inflation pressures,” Frederic Neumann, a Hong Kong-based economist at HSBC Holdings Plc, said in a report after the rate decision.
The nation’s consumer inflation will likely ease from this month as food prices are expected to stabilize because of cold weather and an outbreak of foot-and-mouth disease, Finance Minister Yoon Jeung Hyun said last week.
-------------------Consumer confidence
Domestic private consumption may slow as consumer confidence fell to the lowest level in almost two years in March, the finance ministry said in its latest monthly economic report last week. It also said the economy is facing “higher uncertainty” due to volatile oil prices, the effects of Japan’s earthquake last month, and Europe’s debt crisis.
Strengthening exports and recovering domestic demand last year drove the fastest growth since 2002 in Asia’s fourth- largest economy, stoking inflation pressure and prompting the central bank to raise interest rate from a record-low 2 percent since early July.
President Lee Myung Bak declared “war” on inflation in January, saying it must be contained at 3 percent, a level exceeded in each of the past seven months.
“It will be just a brief pause” in increasing interest rates “as inflation pressures are still intolerably high,” Park Sang Hyun, chief economist at HI Investment & Securities Co. in Seoul, said before the announcement.