S. Korean freezes key rate, hints at tight bias
September 10, 2009 9:36 am
By Kim Soo-yeon
SEOUL, Sept. 10 — South Korea's central bank on Thursday held its key interest rate steady for a seventh month, but hinted it would conduct a rate hike if housing prices continue their upward trend.
The Bank of Korea (BOK) froze the seven-day repo rate at a record low of 2 percent for September, as widely expected. It cut the rate by a total of 3.25 percentage points between October and February in an attempt to put the brakes on a sharp economic free-fall.
After a monthly policy meeting, BOK Gov. Lee Seong-tae dropped a hint that the timing of a possible rate increase could depend on the future movement of the housing market.
"We will keep a wary eye on future home prices, hoping that the housing market will firm up on the back of recent measures to curb mortgage lending," Lee said.
He repeatedly warned of a sharp gain in home-backed lending, which is sparking worries about an unusual gain in housing prices and possible asset inflation. "Despite tougher lending rules, recent jumps in mortgage loans are worrisome. The BOK will continue to watch the trend."
However, the top central banker said the BOK will continue its softer monetary policy for the time being due to uncertainties for growth, but noted that a possible rate increase does not translate into a shift to a tightening stance.
"Even if the policy rate is raised, it can be said that the accommodative policy stance is maintained. The strength of the current easing steps is considerably high," Lee said. A batch of economic data are underpinning growing optimism that the South Korean economy, Asia's fourth-largest, has passed its worst downturn in more than a decade, although the overall outlook remains murky.
The country's industrial output posted its first annual rise in 10 months in July, and a set of business and consumer confidence indicators rose to highs not seen in years last month.
Korea's consumer inflation remained relatively low at 2.2 percent in August, though it grew at the fastest pace in three months.
Experts are divided over the timing of a rate hike while the government has reiterated that it will stick to its "expansionary" economic policy for the time being, as it is too early to say that the economy is making a full recovery.
After August's rate-setting meeting, Gov. Lee hinted that the bank will likely mull raising the rate, saying that it will keep a wary eye on economic trends during the third quarter.
Some argue that if third-quarter economic performance is stronger than expected, the bank may make a rate increase in the October-December period.
Korea's export-dependent economy grew 2.6 percent in the second quarter from three months earlier on the back of government stimulus measures. It advanced 0.1 percent on-quarter in the January-March period after tumbling 5.1 percent in the final quarter of last year.
A number of global investment banks have raised their growth forecasts for the Korean economy, and on Tuesday the state-run Korea Development Institute said the economy will likely shrink 0.7 percent this year, sharply up from its previous projection of a 2.3 percent decline. (PNA/Yonhap) ALM/rsm
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