South Korea Keeps Interest Rates Steady


South Korea's central bank held interest rates steady on Thursday, as expected, in the face of  risk from turbulent global financial markets and despite data bolstering the case for further monetary tightening.

The Bank of Korea said its monetary policy committee kept the overnight call rate target unchanged at 5% for the second month in a row, in line with the unanimous forecast by economists in a Reuters poll earlier this week.

Investors shrugged off the widely expected move, awaiting Governor Lee Seong-tae's news conference due to begin shortly. His opinion on a recent set of  data pointing to stubbornly high money growth amid a booming economy will be keenly awaited.

"We see the Bank of Korea keeping rates unchanged for another six months, adopting a wait-and-see stance in the face of the subprime issue and the upcoming (South Korean) presidential election. We may see another rate move in mid-2008," said Lim Ji-won, an economist at JPMorgan Chase.

"The effect of the subprime crisis will probably be felt in the form of a slowdown in exports, likely in the fourth quarter of this year and the first quarter of 2008."

All 10 economists surveyed by Reuters had predicted the Bank of Korea would hold the call rate target steady on Thursday, and six of them saw the rate staying at least for six more months due to fears of a slowing global economy.

The central bank lifted interest rates by a quarter of a percentage point each in July and August to a six-year high, marking the sixth and seventh increases under the current tightening cycle since October 2005. 

But a series of data released this week showed a majority of South Koreans expected Asia's fourth-economy to enjoy accelerating growth, money supply growth picked up in August and bank lending grew sharply in September.

A slow U.S. economy and the anticipated impact on the global economy from the U.S. subprime mortgage crisis could slash demand for South Korean exports, but analysts said it would take a while before the process fully unfolds.

Asian economies including China's and Japan's have until now shown resilience despite the U.S. subprime crisis, and many central banks in the region are tightening monetary policy to keep inflation in check amid booming economic growth.

China's central bank raised interest rates last month for the fifth time this year and Singapore's took a monetary tightening step on Wednesday by allowing its currency to climb.