Bank of Korea keeps key interest rate at record low as economy recovers

Bank of Korea keeps rate at record low 2 percent

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. All economists at 14 financial institutions surveyed by Yonhap Infomax, the financial arm of Yonhap news agency, predicted the rate would be unchanged.

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.

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’s hiked its key interest rate to 10.25 percent on Wednesday from 9.5 percent to try and cool its red-hot economy, which grew 9 percent in the first quarter.

Despite South Korea’s solid economic recovery, the country’s financial markets have suffered along with others throughout the world amid the uncertainty surrounding Europe.

A spike in tensions with rival North Korea over the March sinking of a South Korean warship in which 46 sailors died has also contributed to declines in stocks as well as South Korea’s currency, the won.

South Korea’s financial markets were mixed Thursday after the rate decision. Seoul’s benchmark stock index rose 0.4 percent at around midday to 1,654.33.

The won, however, fell 1.4 percent to 1,266.30 against the dollar. The South Korean currency last month slid to its lowest levels against the greenback since July last year.