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The Bank of Korea kept interest rates steady at 2.00%
The Bank of Korea kept interest rates steady at 2.00%
Thu, Feb 11 2010, 06:15 GMT
by ecPulse.com analysis team
The Bank of Korea decided today to keep interest rates steady at the low record of 2.00% for the 12th straight month meeting market expectations. Policy makers aim at giving the economy more time to benefit from low borrowing costs to support recovery in Asia’s fourth largest economy.
Mixed fundamentals seen recently in South Korea, besides the government’s pressures forced Governor Lee to keep rates steady after slashing the benchmark interest rates by 325 basis points between October 2008 and February 2009, hoping to help the end the negative effect of the worst recession since 1930’s.
A report yesterday showed unemployment rate inclined to 4.8% the highest since February 2000, which is threatening recovery in Korea, especially that consumer confidence dropped and domestic spending declined that was reflected on economic activity. Economic growth slowed to 0.2% in the fourth quarter of last year after the economy expanded 3.2% in the previous three months.
On the other hand, exports that account for 60% of the GDP advanced in December. Overseas shipments jumped 47.1% by the end of 2009, while industrial production topped forecasts and inflation accelerated, having consumer prices rising 3.1% in December from a year earlier. Producer prices rose 2.8% in December from a year earlier, the highest in 10 years, which is adding pressures on the central bank to raise interest rates.
The Korean Finance Minister said “it is premature for South Korea to pursue an aggressive exit strategy such as an interest rate increase”. He added that the government will be monitoring external risks after Greece had to use different measures to narrow the budget deficit.
Moreover, policy makers are delaying raising interest rates to avoid an increase in the won’s value that is corroding corporate earnings and affecting exports negatively, worth mentioning that the won gained 8% against its American counterpart in 2009, making Korean products lose a competitive advantage.
Yet, the central bank raised its inflation target range for the next three years giving a chance for the board members to keep the overnight cash target at its lowest record. The goal for 2010 to 2012 will be 3% plus or minus 1%, and the current target is 3% plus or minus 0.5%. It is highly expected that BOK will raise interest rates in the second half of 2010 or maybe earlier as inflation is accelerating that will be threatening recovery in Asia’s fourth largest economy.