Bank of Korea freezes key rate for 5th month

(ATTN: RESTRUCTURES paras 2,5; UPDATES with remarks by economists in paras 15-16)
By Kim Soo-yeon
SEOUL, July 9 (Yonhap) -- South Korea's central bank froze its key interest rate
for the fifth straight month on Thursday, saying that the local economy has
emerged from a downturn amid easing inflationary pressure.
But Bank of Korea (BOK) Gov. Lee Seong-tae warned against a sharp rise in
mortgage loans, which is leading to concerns about an unusual gain in housing
prices and possible asset inflation down the road when the economy begins to pick
up.
In a monthly policy meeting, the BOK left the benchmark seven-day repo rate
unchanged at a record low of 2 percent, as widely expected. The BOK made six
consecutive rate cuts totaling 3.25 percentage points between October and
February in a bid to bolster the slumping economy.
"The local economy seems to have escaped from a big shock, but is still
sluggish," Lee told a press conference. "In the second half, the economy will
likely grow, but the recovery is expected to be very weak."
Emphasizing that the growth outlook remains uncertain due to rising oil prices
and a protracted slump in the global economy, Lee reiterated the BOK will
maintain its accommodative monetary policy for the time being.
His remarks came as some economic data are underpinning rising optimism that
Asia's fourth-largest economy may be bottoming out, although other readings --
including those on the local job market -- still remain lackluster, leading
policymakers to be cautious about the pace of economic recovery.
South Korea's industrial output posted its fifth consecutive monthly expansion in
May. Exports declined a less-than-expected 11.3 percent in June from a year
earlier, leading the country's trade surplus to reach a record US$7.4 billion.
While casting a cautious view about the economy, Lee warned against a fast rise
in home-backed lending, saying that an additional gain in housing prices could
incur problems.
"Growth in home-backed lending seems to be considerably high. The situation calls
for close monitoring," he added.
In a bid to find revenue sources amid a protracted economic slump, local banks
have been scrambling to increase their mortgage lending this year, stoking
worries about rising housing prices and possible asset bubbles.
The BOK said consumer prices will likely grow slowly for the time being due to
slumping demand, but rising oil prices would increase upward pressure on
inflation.
"Consumer prices will likely see stability in the second half into next year,"
Lee said, adding that after August, they would not fall further as inflation has
been low since August 2008.
South Korea's consumer prices rose 2 percent in June from a year earlier, the
slowest pace in 22 months, alleviating concerns that inflation may hamper an
economic recovery and spark asset bubbles.
Experts say that although signs of an economic recovery are increasing, it is too
early for the central bank to move away from its monetary easing policy, given
lingering economic uncertainty.
"The BOK is likely to freeze the rate throughout this year, considering its
assessment of the economy," said Lee Sung-kwon, an economist at Goodmorning
Shinhan Securities Co. "A rate hike may be possible as early as the first quarter
of next year, and any future moves by the U.S. Federal Reserve will likely be
closely monitored."
Lim Ji-won, an economist at JPMorgan Chase & Co., said if evidence shows clearly
that the global economy has escaped from the slump in the second half, talk may
begin about a rate increase.
The government has reiterated that it will stick to its "expansionary" economic
policy, and that it is premature to say that the economy is making a full
recovery.
The finance ministry said in late June that the Korean economy is expected to
shrink 1.5 percent this year, revising up its earlier forecast of a 2 percent
contraction on indications that the downturn is abating thanks to stimulus
packages. The BOK forecast earlier that the local economy will decline 2.4
percent in 2009 and plans to unveil a revised outlook on Friday.
sooyeon@yna.co.kr
(END)