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(3rd LD) Bank of Korea freezes key rate for 14th month in April

All Headlines 15:01 April 09, 2010

(ATTN: REWRITES lead; UPDATES with details, remarks by analysts in paras in paras 12,15)
By Kim Soo-yeon

SEOUL, April 9 (Yonhap) -- South Korea's central bank froze its key interest rate for the 14th straight month at the first rate-review session under its new chief on Friday and hinted that the credit-easing policy will continue for some time.

New Bank of Korea (BOK) Gov. Kim Choong-soo and five policymakers held steady the benchmark seven-day repo rate, dubbed the base rate, at a record low of 2 percent, as widely expected.

"The BOK plans to keep its accommodative policy stance for the time being in a bid to help boost the economic recovery while taking into account overall economic and financial conditions," Kim told a press conference after chairing his first rate-setting meeting.

His rate-review meeting has drawn keen attention from market players and media outlets hoping to get a glimpse into his monetary policy direction, but Kim, who took office last week, made no surprising remarks during the conference.

The decision comes amid increasing market expectations that Kim, widely seen as dovish, will likely keep borrowing costs low for some time, as he stressed coordination with the government. Market players increased bets that the timing of a potential rate hike will be pushed back into the second half or even later.

The governor emphasized global policy coordination in his inauguration speech, and Finance Minister Yoon Jeung-hyun and the BOK chief agreed on Monday in a meeting to cooperate in pushing for economic and monetary policy measures.

Regarding the timing of a potential rate hike, Kim said it is necessary to check whether the private sector can stand on its own as a prerequisite for the shift into a tight bias.

"The self-sustaining recovery of the private sector is needed prior to any hike of the rate," the new governor said.

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 recovery last year.

The on-year growth of the indicator on the country's future economic outlook slowed for the second straight month in February and the still-chilly local job market is leading policymakers to strike a cautious stance. Meanwhile, South Korea's consumer prices grew 2.3 percent in March from a year earlier, the slowest pace in five months.

Kim shared the view that the Korean economy is on the recovery path while downside risks such as China's liquidity controls and euro-zone countries' debt crisis linger.

"South Korea's consumer prices are expected to remain stable for the time being, but inflationary pressure is likely to considerably pick up starting in the second half," Kim said.

Many economists said it would be difficult for the central bank to raise borrowing costs in the first half with some arguing that a potential rate increase may come next year.

"The timing of exit strategies by major advanced economies and the pace of the global economic recovery are expected to serve as a prerequisite for a rate hike by the BOK," said Oh Chang-sup, an economist at IBK Securities. "The central bank is likely to gradually raise the rate as early as in the second half or starting in the first half of next year."

Lee Sung-kwon, a chief economist at Shinhan Investment Corp., said that as domestic demand and the construction sector have not yet fully recover, there is a chance that growth momentum may slow. "The timing of a rate hike may be delayed into next year."

The finance minister said last month 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 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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