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(LEAD) Bank of Korea freezes key rate for 13th month in March

All Headlines 10:59 March 11, 2010

(ATTN: RECASTS lead; ADDS more details and statement by BOK in paras 3-4; TRIMS throughout)
By Kim Soo-yeon

SEOUL, March 11 (Yonhap) -- South Korea's central bank held its key interest rate steady for the 13th straight month on Thursday amid lingering economic uncertainty and intense government pressure to keep the rate low.

The Bank of Korea (BOK) froze the benchmark seven-day repo rate, dubbed the base rate, at a record low of 2 percent at the final rate-setting meeting of incumbent BOK Gov. Lee Seong-tae. His four-year term ends on March 31.

"The Korean economy will likely maintain its positive growth trend...But there is a considerable degree of uncertainty over the growth path, caused by fiscal problems of euro-zone countries," the BOK said in a statement.

The central bank reiterated that it will maintain its accommodative policy stance for the time being in a bid to help boost the economic recovery.

"Economic uncertainty at home and abroad warrant a rate freeze over an extended period of time. Euro-zone budget deficit woes, along with potential tighter bank rules in the U.S. and China's tightening stance, are amplifying economic risks," said Lee Sung-kwon, chief economist at Shinhan Investment Corp.

The South Korean economy has been on a recovery track, but a set of recent economic data are raising concerns that the momentum might be slowing after the faster-than-expected rebound last year.

South Korea's economy, Asia's fourth-largest, grew 0.2 percent on-quarter in the final three months of 2009, sharply down from a 3.2 percent gain in the third quarter. The indicator on the country's future economic outlook also fell for the first time in 13 months in January, and the still-chilly local job market is prompting policymakers to strike a more cautious note about the pace of the recovery.

Many economists said it would be difficult for the central bank to raise borrowing costs in the first half due to persisting economic uncertainty and government pressure for the BOK to keep the rate low.

The office of President Lee Myung-bak is currently weighing several figures to replace Gov. Lee. But those widely rumored to be likely candidates for the post have shown what analysts describe as a pro-government stance, raising questions over whether the BOK will be able to remain independent in setting its monetary policy.

The government in January began sending its vice finance minister to the BOK's rate-setting meeting, a move widely seen as aimed at preventing the bank from raising the rate in the near term.

Finance Minister Yoon Jeung-hyun said on Monday that it is too early for the central bank to hike the rate as the private sector cannot yet stand on its own. He said the government plans to take a "cautious and balanced" approach to the much-debated issue of when and how to roll back emergency steps taken to overcome the global economic downturn.

The BOK slashed the key rate by a total of 3.25 percentage points between October 2008 and February 2009 in an effort to put the brakes on a sharp economic freefall.


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