South Korea Holds Rates Steady for 7th Month


South Korea's central bank held interest rates steady for a seventh consecutive month on Friday, as widely expected, but economists said rates have probably peaked and may head down from as early as next month.

A media official at the Bank of Korea said the central bank set its base rate at 5.00 percent for the first time this month, saying it was equivalent to the 5.00 percent overnight call rate target set for each of the previous six months.

The central bank's base rate, which will apply to its regular 7-day repurchase agreements until it reviews the rate next month, replaced the overnight call rate target adopted first in 1999 as its benchmark.

Economists said the Bank of Korea opted to stay on hold in the face of conflicting factors such as consumer inflation remaining above its target range and a lack of evidence that Asia's fourth-largest economy had started to cool.

"I think the BOK is likely to cut interest rates next month," said Park Sang-hyun, chief economist at CJ Investment & Securities. "The governor will talk about inflation to explain today's decision, but he is likely to mention downside risk to give a signal for a rate cut."

Local financial markets were steady at earlier levels as the decision came as no surprise to investors, who were instead awaiting the news conference by Bank of Korea Governor Lee Seong-tae due to start later in the session.

In a Reuters poll, 19 out of 21 economists had expected the central bank to hold rates steady this week, while the other two had expected rates to fall.

The Bank of Korea's first statement after the decision provided comments which clouded the rates outlook. It said there was a heightened possibility of inflation accelerating, while economic growth could slow, both due to global factors.

The central bank lifted its benchmark overnight call rate target by a total of 1.75 percentage points between October 2005 and August last year to tackle inflation and help cool the real estate market.