Bank of Korea freezes key rate at 2 pct

SEOUL, May 12 (Yonhap) -- South Korea's central bank froze its key interest rate for a third straight month on Tuesday, saying that the slowing pace of the economy has clearly eased.

In a monthly policy meeting, the Bank of Korea (BOK) left the benchmark seven-day
repo rate unchanged at a record low of 2 percent, as widely expected. The BOK had
made six consecutive rate cuts totaling 3.25 percentage points until February in
a bid to bolster the slumping economy.
"In recent months, the pace of the downturn in domestic economic activity has
clearly eased," the BOK said in a statement. "In the coming months, the Korean
economy is likely to register mildly positive growth on-quarter, but a high
degree of uncertainty lingers given the existence of both upside and downside
risks."
The rate freeze comes as a set of economic indicators are reinforcing cautious
optimism that the Korean economy, Asia's fourth-largest, may be approaching its
bottom.
The South Korean economy narrowly averted a recession, or two straight quarters
of contraction, by growing 0.1 percent in the first quarter from three months
earlier. It shrank 5.1 percent in the last quarter of 2008.
In March, the country's industrial output grew 4.8 percent from a month earlier,
maintaining an on-month expansion from January. South Korea posted a record trade
surplus of US$6 billion in April.
Local financial markets have also been stabilizing, thanks largely to a buying
spree of Korean stocks by foreign investors. The Seoul bourse has risen over 25
percent so far this year and the Korean currency has gained almost 27 percent to
the greenback since hitting an 11-year low on March 2.
But despite some budding signs of a turnaround, the government has struck a
cautious note, saying it is difficult to predict the timing of a sustained
economic recovery due to bleak external conditions.
The local job market has continued to take hits, prompting more households to cut
back on their spending. The country's jobless rate rose to 4 percent in March and
195,000 jobs were eliminated from payrolls, the highest since the 1997-98 Asian
financial meltdown.
On concerns over rising short-term liquidity, the finance ministry said last week
it is not the time to absorb the money that authorities have pumped into the
markets, given current economic conditions. But the government added it will
closely monitor the overall money flow.
Experts say it is unlikely that the central bank is already mulling raising the
key rate, as the real economy is still in a contraction phase and credit is not
fully flowing.
Economists said the BOK may hold off on taking any more monetary easing measures
this year, as long as the economy does not abruptly deteriorate.
"If momentum for economic recovery is not severely dented or the credit crunch
does not become serious, the BOK will likely not cut the rate this year," said
Shin Dong-su, an economist at NH Investment & Securities Co.
The BOK predicted that the Korean economy will contract 2.4 percent this year,
the worst performance in 11 years, stung by falling exports and weakening
domestic demand.
The economy may hit bottom in the second or third quarter, but it is expected to
recover very slowly due to uncertainty about the global recession, it added.
sooyeon@yna.co.kr
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