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S.Korea Central Bank Holds Rates, Cut Seen in Early 2013

Murat Taner | Photographer's Choice | Getty Images

South Korea's central bank kept interest rates on hold for a second consecutive month on Thursday, as it feels out the effects from two rate cuts this year as well as latest policy easing from the U.S. Federal Reserve.

The Bank of Korea's monetary policy committee held its base rate steady at 2.75 percent, a media official said without elaborating. Governor Kim Choong-soo is due to hold a news conference from 11:20 a.m. (0220 GMT).

Fifteen out of the 16 analysts polled by Reuters forecast the central bank would stay its hand in December while leaving the door open for another cut possibly early next year.

A majority in the poll expected another rate cut sometime in the first half of next year, but a growing number of analysts now predict no more policy easing amid signs that the U.S economy may be starting to recover.

"External conditions would have to deteriorate further to justify another rate cut, but Korean exports are starting to turn around while U.S. data is showing some improvement," said Kim Jong-su, economist at NH Investment & Securities, adding the BOK could tighten policy in the second half.

The South Korean central bank's decision came hours after the U.S. Fed announced new round of monetary stimulus and said it would keep interest rates near zero unless unemployment falls to at least 6.5 percent.

Still, South Korea faces a myriad of uncertainties inside and outside the country that could easily destabilize the economy, one of them being its closest neighbor, North Korea, which fired a long-range missile on Wednesday.

The country will also go through an administration change early next year, as South Koreans will elect a new president on December 19. No matter who wins, the new government is expected to focus on welfare and job creation.

The U.S. "fiscal cliff" also poses as a threat to Asia's fourth-largest economy which relies mostly on exports.

South Korea's quarterly economic growth slowed to a seasonally adjusted 0.1 percent in the third quarter, the slowest in three and a half years because of weak overseas demand as well as companies reducing spending to guard against the uncertain outlook.

Inflation in November slowed further below the central bank's target to 1.6 percent year-on-year, underscoring weak momentum and giving the Bank of Korea more breathing room to cut rates.


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