Bank of Korea Keeps Rate at 2% Amid Signs of Recovery

By Seyoon Kim

July 9 (Bloomberg) -- The Bank of Korea left its interest rate unchanged at a record low for a fifth month today, saying it will keep an accommodative policy as the economy recovers from the global recession.

“South Korea’s economy and the global economies may improve next year, but it seems that it’ll be hard for global trade to recover in a short time,” Governor Lee Seong Tae told reporters in Seoul after he held the seven-day repurchase rate at 2 percent.

The central bank follows counterparts in Australia and Europe, which both kept borrowing costs at historic lows in the past week to support their economies. The International Monetary Fund and Goldman Sachs Group Inc. this week upgraded forecasts for the South Korea’s gross domestic product in 2009, citing stimulus from rate cuts and government spending.

“Governor Lee has made it clear that the central bank will leave rates unchanged at least through the end of the year,” said Oh Suktae, an economist at Citigroup Inc. in Seoul. “The bank may raise rates early next year when there are more visible signs of a solid recovery.”

Today’s decision was expected by all 15 economists surveyed by Bloomberg News.

Leaders from the Group of Eight nations said yesterday the global economic pickup from the steepest recession since World War II was too fragile for them to consider reversing efforts to pump money into the economy. The group includes the U.S., Germany and Russia.

Shares Gain

South Korea’s Kospi stock index rose 0.4 percent to 1,437.03 at 1:57 p.m. in Seoul today. The index climbed 15 percent in the three months ended June 30, the most since the second quarter of 2007. The won fell 0.1 percent to 1,277.57 against the dollar.

Policy makers “will maintain an accommodative policy stance for the time being,” the Bank of Korea said in a statement today. Governor Lee said the board needs to take a “cautious stance” on interest-rate decisions because growth may be weak in the second half.

The bank reduced the benchmark rate by 3.25 percentage points between October and February, the most aggressive easing since it began setting a policy rate a decade ago.

South Korea joined India, China and Australia as one of the few major economies to grow in the first quarter, with GDP expanding 0.1 percent from the previous three months. Consumer confidence jumped to the highest in almost two years in June.

Export Recovery

Exports, which are equivalent to 50 percent of GDP, gained 17 percent in June from May to an eight-month high. The won has fallen 27 percent versus the dollar since the start of last year, boosting overseas earnings for exporters.

Samsung Electronics Co., the world’s second-largest chipmaker, said this week that second-quarter operating profit probably jumped more than fivefold from the previous quarter.

South Korea’s “rapid and comprehensive fiscal, monetary and financial policy response helped limit the depth of the downturn,” the IMF said on July 7. “With little inflationary pressures, the current stance would need to be maintained until a self-sustained recovery is clearly established.”

Economists are debating when the central bank will begin to unwind its interest-rate cuts.

Kwon Young Sun, an economist at Nomura Holdings Inc., said last week he expects the bank to raise borrowing costs in November, because keeping rates low for too long could fan excessive borrowing and stoke an asset-price bubble.

Governor Lee said today the bank is monitoring a “big” increase in mortgage lending and a pickup in real estate prices.

Bank lending to households expanded in June by the most in more than two years on increased demand for mortgages.

The financial regulator said this week it will tighten loan regulations for people purchasing homes in the capital Seoul and surrounding areas to stem a surge in borrowing.

“The economy is recovering faster than we expected thanks to a good mix of strong fiscal stimulus, a weak Korean won and monetary easing,” said Kwon Goohoon, an economist at Goldman Sachs in Seoul. A rate rise may come “as early as in the first quarter of 2010, but the tightening cycle will likely be slow.”

To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net