Bank of Korea keeps key rate at record low

AP News
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Posted: Nov 12, 2009 5:00 AM

South Korea's central bank left its key interest rate at a record low for the ninth straight month Thursday, pledging to maintain low borrowing rates to help extend a recovery in Asia's fourth-largest economy.

The Bank of Korea decision to keep the benchmark seven-day repurchase rate at 2 percent came at a monthly policy meeting and was in line with expectations.

The bank's monetary policy committee said in a statement that it will stick to its "accommodative policy stance for the time being with an emphasis on sustaining the recovery of economic activity." The wording was broadly similar to last month's statement.

South Korea's economic recovery, a rise in housing prices and a decision last month by Australia's central bank to lift rates had created expectations the Bank of Korea might hike borrowing costs at its October meeting.

However, the bank at the time largely doused speculation an increase would come before the end of the year by offering no fundamental change in wording to its policy statement.

Central banks often flag upcoming policy changes by altering their statements to give investors and markets ample understanding of their motives and time to prepare.

Goldman Sachs' economist Kwon Goohoon said in a report Thursday a rate hike will probably come in the first three months of 2010 and any increases are "likely to be gradual and moderate."

The central bank slashed the rate six times since more than a year ago to help battle the effects of the global financial crisis. Declines in global consumer demand amid the world slowdown hit South Korean exporters.

The South Korean economy has now fought back from its worst slowdown since the 1997-98 Asian financial crisis on a rebound in exports and production.

South Korea recorded three straight quarters of growth since contracting 5.1 percent in the final three months of 2008. It grew 2.9 percent in the third quarter ended Sept. 30, the strongest quarterly performance in more than seven years.

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Consumer and business confidence are both at seven-year highs and unemployment in October fell to 3.2 percent, the lowest level in 11 months. The jobless rate peaked at a three-year high of 4 percent in March.

The benchmark Kospi stock index fell 1.4 percent to close Thursday at 1,572.73, while the South Korean won rose marginally against the dollar to close at 1,157.30, the highest finish in nearly a month.

Alaistair Chan, an economist with Moody's.com in Sydney, Australia, said in a report that any rate hike will be delayed "by a number of months."

He cited tightened restrictions on mortgage lending, opposition to higher rates by the finance ministry and the central bank policy committee's own assessment Thursday that "the upward trend in real-estate prices appears to have faltered."