Bank of Korea keeps key interest rate near record low amid weakening global outlook

Bank of Korea keeps interest rate near record low

SEOUL, South Korea — South Korea’s central bank left its key interest rate near a record low Thursday for a second straight month as the risk of slowing global growth outweighed a buoyant outlook for the local economy.

The Bank of Korea had left the rate at a record low 2 percent for 17 months before raising it to 2.25 percent in July amid a strong domestic economic expansion and worries about higher inflation.

South Korea has rebounded strongly from the worldwide economic downturn to expand six straight quarters, boosted by low borrowing costs, government stimulus spending and robust exports.

Asia’s fourth-largest economy, however, is showing signs of weakening. Though the overall outlook remains strong for this year, growth in the three months ended June 30 slowed to a revised 1.4 percent from 2.1 percent in the previous quarter.

The global situation has also turned cloudy, with slowing growth in the United States, China and Japan — all key South Korean trade partners.

Still, the central bank, which said the global economy faced potential difficulties if major economies weaken, was largely upbeat about South Korea’s own prospects.

“The domestic economy is expected to continue on an upward track, even in the presence of external risk,” the bank’s monetary policy committee said in a statement.

The committee also kept the phrase “accommodative policy stance” in its statement for a second straight month, suggesting that any future interest rate increases would be limited and that the borrowing cost will remain fundamentally low.

The International Monetary Fund earlier this month raised its 2010 growth forecast for South Korea’s economy to 6.1 percent from 5.75 percent, but predicted the expansion would slow to 4.5 percent next year.

South Korea’s economy contracted in the final six months of 2008 amid the global financial crisis and managed growth of just 0.2 percent for all of 2009.

The decision to leave the rate unchanged came as a surprise to some analysts. A total of six economists at 10 financial institutions surveyed by Yonhap Infomax, the financial arm of Yonhap news agency, predicted the bank would hike the rate to 2.5 percent.

Financial markets took the rate decision in stride. South Korea’s benchmark stock index rose 0.3 percent to close at 1,784.36. The South Korean won rose 0.5 percent to 1,167.40 to the dollar.