Sat, Feb 12, 2011 - Page 10 News List

Bank of Korea maintains key interest rate

UNEXPECTED MOVE:The central bank chief signaled that the freeze might be only temporary, saying the bank would move at its own pace in normalizing interest rates

Bloomberg

The Bank of Korea unexpectedly left interest rates unchanged even after inflation breached the central bank’s 4 percent ceiling.

In a split decision, policymakers yesterday kept the seven-day repurchase rate at 2.75 percent. The outcome was forecast by three of 12 economists surveyed by Bloomberg News. The others expected a quarter-point boost.

Bank of Korea Governor Kim Choong-soo hinted that the pause might be only temporary, saying the central bank would move at its own pace in “normalizing” rates.

He said policymakers have various tools to tackle inflation, while the finance ministry said separately that officials were to meet yesterday afternoon to discuss more steps to stabilize consumer prices.

South Korean President Lee Myung-bak “called for a ‘war against inflation’ last month, but it looks like the Bank of Korea has implemented a truce, at least for now,” said Brian Jackson, a Hong Kong-based senior strategist at Royal Bank of Canada.

He said rates are likely to keep rising “in the months ahead.”

Kim and his officials may still be assessing the effects of last month’s boost in borrowing costs on economic growth, which cooled in the fourth quarter.

“We will move ahead with normalizing interest rates at a pace that’s not too slow, nor too fast,” Kim told a press briefing in Seoul.

South Korea’s pause contrasts with the People’s Bank of China this week raising interest rates for the third time since the middle of October. Asian policymakers face heightened inflation risks as money flows into the region leading the global recovery.

South Korean Finance Minister Yoon Jeung-hyun said this week that the government would review prices charged by oil refiners and mobile-phone service providers after the government said last month that it would freeze utility charges and cut some food import tariffs.

Inflation may stay at about 4 percent, the central bank’s ceiling, for “some time,” Kim said.

Consumer prices rose 4.1 percent last month from a year earlier. Producer prices jumped 6.2 percent, the most in 26 months, a report yesterday showed.

While policymakers remain concerned about inflationary pressures, higher borrowing costs could add to the burdens of debt-bearing households, small businesses and low-income earners, Kim said.

Lending to households fell for the first time in 11 months last month, a report issued on Thursday showed.

Details of the split among the six members of the monetary policy board will be disclosed in six weeks’ time, when the minutes of the meeting are released.

The central bank will probably resume raising interest rates next month, Goldman Sachs Group Inc said. Borrowing costs have lagged behind the pace of inflation for 15 straight months, a sign that further rate increases may be warranted.

“It was a close call, but we thought that it’s more likely for them not to raise this time and pause and signal a hike later in March,” Goohoon Kwon, a Seoul-based economist at Goldman Sachs, said on Bloomberg Television.

He expects the rate to rise to 3.5 percent by the end of this year.

Policymakers will allow gains by the won, along with rate increases, to cool inflation, Kwon said.

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