Bank of Korea Holds Interest Rate as Growth Cools

The Bank of Korea unexpectedly left interest rates unchanged as it assesses how last month’s increase in borrowing costs affects an economy where quickening inflation has been coupled with slower growth.

Governor Kim Choong Soo and his policy board kept the seven-day repurchase rate at 2.75 percent, the bank said in Seoul today. The decision was forecast by three of 12 economists surveyed by Bloomberg News. Nine expected a quarter-point boost.

Delaying rate increases could fan inflation that’s already above the central bank’s 4 percent ceiling and may accelerate as consumers’ price expectations rise. Tighter credit appears to be cooling demand, with a report yesterday showing household lending fell for the first time in 11 months in January.

President Lee Myung Bak “called for a ‘war against inflation’ last month, but it looks like the Bank of Korea has implemented a truce, at least for now,” said Brian Jackson, a Hong Kong-based senior strategist at Royal Bank of Canada. “We think this will be a temporary pause and continue to expect further rate hikes in the months ahead.”

The central bank will probably resume raising interest rates in March, according to Goldman Sachs Group Inc. Borrowing costs have lagged the pace of inflation for 15 straight months, a sign that further rate increases may be warranted.

The won fell 0.2 percent to 1,119.40 per dollar as of 10:30 a.m. in Seoul and the Kospi share index rose 0.3 percent.

March Rate Increase

“It’s a close call, but we still expect hikes in baby steps, with the next hike to come in March,” Kwon Goo Hoon, a Seoul-based economist at Goldman Sachs, wrote in a note yesterday. “Aggressive successive hikes or a market perception as such could destabilize housing markets and overly suppress domestic demand, given large household debts vulnerable to rate hikes.”

Policy makers may opt to reach their inflation target by using foreign-exchange policy rather than only relying on interest rates as a tool to cool growth, Kwon said.

Government officials will meet later today to discuss further steps to stabilize consumer prices.

Finance Minister Yoon Jeung Hyun said this week the government needs to act “preemptively” to tackle inflation pressures. The government will also use all possible policy means, including fiscal, financial, tax and deregulation measures, to help achieve 5 percent economic growth and contain inflation at 3 percent this year, Yoon said.

China's Move

Producer-price inflation accelerated to 6.2 percent in January from a year earlier, the fastest pace in 26 months, a a central bank report showed today. From December, prices rose 1.6 percent.

The People’s Bank of China this week raised interest rates for the third time since mid-October, joining counterparts in India, Indonesia and Thailand in boosting rates this year to tackle inflation as Asia leads the global recovery.

“The BOK needs to act more aggressively to keep inflation expectations from running out of control,” Kwon Young Sun, an economist at Nomura Holdings Inc. in Hong Kong, said before the announcement.

The yield on the government’s 3 percent bond due December 2013 rose one basis point to 3.96 percent as of 11:07 a.m. in Seoul, according to the Korea Exchange. The rate reached 4.09 percent on Feb. 7, the highest since the note begun trading in December.

Inflation Target

The Bank of Korea targets inflation of 2 percent to 4 percent through 2012 and aims for the midpoint of the range in the medium term. Its policy board raised the benchmark rate by a quarter of a percentage point in July, November and January from a record-low 2 percent.

The central bank forecasts 4.5 percent economic expansion in 2011, slowing from 6.1 percent last year, and predicts inflation will accelerate to 3.5 percent from 2.9 percent.

Asia’s fourth-largest economy expanded 0.5 percent in the three months through December from the previous quarter, when it grew 0.7 percent. Exports, which account for about half of the $833 billion economy, rose 46 percent in January from a year earlier, the most since August 1988.

（Source From ：Bloomberg）