Bank of Korea keeps key rate at record low 2 percent under new governor

By Kelly Olsen, AP
Thursday, April 8, 2010

Bank of Korea keeps key rate at 2 percent

SEOUL, South Korea — South Korea’s central bank left its key interest rate at a record low Friday as its new governor begins weighing when to end an 18-month-old easy money regime implemented to help fight the global financial crisis.

The Bank of Korea announced that it kept the benchmark seven-day repurchase rate at 2 percent at the first monetary policy meeting chaired by Gov. Kim Choong-soo, whose four-year term began April 1. The decision was widely expected.

Kim, a U.S.-educated economist, and other BOK policy makers must eventually judge when South Korea’s economic recovery will be strong enough to withstand a hike in borrowing costs from the record low where they have stood for 15 months.

The BOK slashed the key rate six times from October 2008 to battle the global financial meltdown and ensuing economic downturn. The rate has been at the current level since February last year.

Under Kim’s predecessor, Lee Seong-tae, the bank came under pressure from the government to keep the rate low to protect the recovery amid international debate about when stimulus measures — including low interest rates — should start to be unwound.

The bank’s monetary policy committee signaled Friday it has no immediate plans to nudge the rate higher, saying in a statement it will stay on hold “for the time being.”

The domestic economic recovery is expected to continue and the global economy is improving, the committee said. But it also cited concerns over “latent risk factors present, including the government debt problems in some European countries.”

The decision was no surprise, said Kwon Goohoon, Goldman Sachs economist in Seoul. In a research note, he said he was sticking to his view that the bank will begin a “gradual and moderate tightening” in the second half of this year.

Financial markets were mixed after the decision.

South Korea’s benchmark stock index fell 0.5 percent to close at 1,724.47, slipping off a nearly 22-month high hit the day before. The South Korean won rose to a nearly 19-month high of 1,118.20 against the dollar.

Asia’s fourth-largest economy recorded four straight quarters of growth in 2009 after contracting in late 2008 amid the global financial and economic downturn.

The expansion slowed in the fourth quarter of 2009 with gross domestic product growing just 0.2 percent. Unemployment eased to 4.9 percent in February, but is still near a nine-year high.

The BOK expects South Korea’s export-oriented economy to grow 4.6 percent this year. It expanded 0.2 percent in 2009, the worst performance since a contraction of 5.7 percent in 1998 during the Asian economic crisis.

Kim, who got his Ph.D. at the University of Pennsylvania, was a senior economic adviser to President Lee Myung-bak. He was South Korea’s ambassador to the Paris-based Organization for Economic Cooperation and Development before Lee picked him last month to lead the central bank.

will not be displayed