South Korea’s central bank yesterday unexpectedly left its key interest rate unchanged because of growing uncertainty about the strength of the global economic recovery.
Contrary to market predictions, Bank of Korea Governor Kim Choong-soo and fellow policymakers froze the benchmark seven-day repo rate for this month at 2.25 percent.
In July, the bank raised the rate for the first time since the start of the world economic downturn, increasing it to 2.25 percent from a record low of 2 percent to forestall inflationary pressures.
“The [South] Korean economy is expected to continue its solid growth, aided by robust exports and recovery in consumption and facility investment, but the possible economic slowdown in major economies and the eurozone debt crisis will act as downside risks to growth,” the bank said in a statement.
It said it would “take into account overall financial and economic conditions at home and abroad” in future policy decisions.
Kim told reporters the current rate was not “desirable,” suggesting a possible tightening to come, but without mentioning a figure, he said it might take some time for the rate to return to a “neutral level” given the uncertainty over the economic recovery.
The IMF last week said a more neutral rate for South Korea would be about 4 percent. It called for a “carefully calibrated” exit from supportive policies.
Meanwhile in Washington, the US Federal Reserve warned on Wednesday that the US economic recovery is showing “widespread” signs of slowing. The central bank said it saw “continued growth in national economic activity” between mid-July and the end of last month, “but with widespread signs of a deceleration.”
The latest Beige Book report, an economic survey which will guide a Sept. 21 policy meeting, painted a dour picture of the health of the economy, with an uneven recovery across the US and across sectors.
The picture from the real estate market showed how deep the crisis remains, with private demand struggling to keep pace after a government tax break was removed.
“Activity in residential real estate markets declined further,” the Fed reported.
“Home sales slowed further following an initial drop after the expiration of the homebuyer tax credit at the end of June, prompting a slowdown in construction activity as well,” the report said.
However, there was some good news from the manufacturing sector and the slightest of signs that Americans might be returning to the shops.
“Consumer spending appeared to increase on balance, despite continued consumer caution,” the report said.
The beige book report will be used at the next meeting of the central bank’s interest rate-setting body, the Federal Open Market Committee, on Sept. 21.
The Fed has set its base rate at a range of zero to 0.25 percent, a policy adopted since December 2008 in a effort to spark growth in the US economy.
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