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Bank of Korea expected to freeze key rate for January

January 06, 2010 | Yonhap News

South Korea's central bank is widely expected to freeze its key interest rate for the 11th straight month in January due to lingering uncertainty about the pace of an economic recovery, a poll showed Wednesday.

All economists at 10 financial institutions predicted that the Bank of Korea (BOK) will keep the benchmark seven-day repo rate, dubbed the base rate, steady at a record low of 2 percent on Friday, according to the poll by Yonhap Infomax, the financial news arm of Yonhap News Agency.

"A rate freeze is expected for this month as the private sector has yet to make a sustainable recovery and risks continue to linger as shown by Kumho Asiana Group's liquidity woes," said Shin Dong-su, an economist at NH Investment & Securities Co.

Asia's fourth-largest economy chalked up a surprise 3.2 percent gain in the third quarter from three months earlier on improving domestic demand and brisk exports. The government predicted in December that the Korean economy will grow 5 percent this year after an estimated 0.2 percent expansion in 2009.

A set of economic data is underpinning optimism that the country will see a fast economic recovery, heightening the debate over when the BOK will shift into a tightening stance.

BOK Gov. Lee Seong-tae said in a New Year's message that the bank plans to manage the rate policy in a way that will help boost the economic recovery for the time being, but added that it will adjust the current easing policy at an appropriate speed and by a proper margin, while taking into consideration the financial and economic situation.

Economists say that given signs of an economic rebound, the BOK may raise borrowing costs as early as February. The governor's four-year term ends in March.

"There is a need to raise the rate in the first quarter, given the side effects that the record low rate could entail," said Kim Yoon-ki, an economist at Daishin Economic Research Institute.

But others say it is possible that the central bank will hike the rate only after the second quarter because of patches of economic uncertainty.

The BOK cut the key 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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