South Korea’s Central Bank Maintains Key Rate at 2%

By Seyoon Kim

Nov. 12 (Bloomberg) -- South Korea’s central bank kept its benchmark interest rate at a record low for a ninth month, seeking to strengthen the economy’s recovery before increasing borrowing costs.

Governor Lee Seong Tae left the seven-day repurchase rate at 2 percent in Seoul, and the Bank of Korea said it “will maintain an accommodative policy stance for the time being with an emphasis on sustaining the recovery of economic activity.”

South Korea is projected to be one of the first in Asia to boost rates as it helps lead the region out of a financial crisis-induced slowdown. Economic growth accelerated to 2.9 percent in the third quarter from three months earlier, the fastest pace in seven years, as companies including Samsung Electronics Co. and Hyundai Motor Co. reported surging profits.

“The sense is that the recovery is proceeding and the central bank will be looking to begin raising rates as we move into next year, probably sometime in the first quarter,” said David Cohen, director of Asian forecasting at Action Economics in Singapore.

Governor Lee and Finance Minister Yoon Jeung Hyun said last month gross domestic product may expand this year, reversing earlier predictions of a contraction. Lee said today economic growth is unlikely to be as strong in the three months through December as it was in the second and third quarters.

Currency Gains

The nation’s currency has climbed more than 8 percent this year. The won was little changed after the decision, trading at 1,157.80 against the dollar as of 1:23 p.m. in Seoul, according to data compiled by Bloomberg.

“Consumer price inflation has continued to be stable, influenced by the appreciation of the Korean won against the U.S. dollar,” the Bank of Korea said in a statement today. “The upward trend of real estate prices appears to have faltered.”

President Lee Myung Bak’s administration increased spending to support consumer purchases and cushion the economy from the worst global recession since World War II. The central bank cut the benchmark rate by 3.25 percentage points between October 2008 and February, the most aggressive easing since it began setting a policy rate a decade ago.

Low rates have spurred consumer borrowing, with bank lending to households rebounding in October, rising 1.4 trillion won ($1.2 billion) to 405.6 trillion won, according to the Bank of Korea. South Korea’s financial regulator tightened rules on non-banking finance companies’ mortgage lending for people buying homes in and around Seoul from Oct. 12 to slow an increase in borrowing.

Inflation Outlook

Governor Lee told reporters in Seoul today that the central bank needs to “normalize” interest rates while assessing developments in the economy.

“It’s evident the 2 percent level of interest rates is a historically low level and we’re weighing whether there are more benefits or losses to the economy,” he said. “It’s hard to be confident how strongly private demand and corporate investment will help support the economy. I can’t say whether a rate increase will be within the year, the first or second quarters of next year.”

Cohen of Action Economics said the inflation outlook gives the Bank of Korea flexibility to wait. Inflation remained below the central bank’s target of between 2.5 percent and 3.5 percent for a fifth month in October.

“Inflation is still contained, and I think that gives them a little bit of flexibility,” Cohen said. “Like central banks around the world, they’re able to be patient right now because inflation is still fairly subdued.”

Interest Rates

The Group of 20 nations said at the weekend interest rates should be kept low and record budget deficits maintained until recoveries take hold. That boosted stock markets including South Korea’s Kospi, which has gained about 42 percent this year.

Even so, Australia’s central bank Governor Glenn Stevens raised the benchmark interest rate by a quarter point for the second straight month on Nov. 3 to 3.5 percent as his nation’s economy rebounds, becoming the first policy maker to increase rates twice this year.

Finance Minister Yoon has said repeatedly that it’s too early to unwind policy steps taken to support the economy. While it’s “up to the central bank” to determine rates, South Korean policy makers “understand it’s premature” to implement an exit strategy from stimulus measures, he said on Oct. 26.

Industrial Production

Industrial production gained 5.4 percent in September from August. Other reports showed manufacturers’ confidence stayed near a two-year high and the unemployment rate fell to a nine- month low of 3.4 percent in October.

Samsung, Asia’s biggest maker of computer chips, flat screens and mobile phones, said Oct. 30 that third-quarter profit tripled to a record 3.72 trillion won as sales, including those of overseas affiliates, climbed 19 percent.

The company forecast a “solid” fourth quarter and said it plans to boost capital spending on semiconductors and displays next year to more than 8.5 trillion won.

Hyundai, South Korea’s largest automaker, more than tripled third-quarter profit to 979.2 billion won on surging sales in the U.S. and China.

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