South Korea Holds Rates as Prices, Economy Worry

South Korea's central bank held interest rates steady for the ninth consecutive month on Thursday, saying Asia's fourth-largest economy was faced with conflicting risks from inflation and economic slowdown.

Korea, Korean Flag
Korea, Korean Flag

The Bank of Korea kept its base rate unchanged at 5.0 percent, a media officer told reporters, without elaborating. Governor Lee Seong-tae is due to hold a news conference later Thursday.

Treasury bond futures extended losses as the decision, though not unexpected, disappointed investors hoping for a rate cut to help the growth-focused government's effort to lift domestic investment.

The won slightly cut losses on the decision.

Analysts said the central bank, which sets interest rates independently, would not cut interest rates before confirming the resources-deficient country has come out of the inflation threat being led by high global commodities prices.

"The decision today isn't unexpected for us because the latest data has suggested that price pressures are indeed still very elevated in Korea," said Frederic Neumann, economist at investment bank HSBC.

"If inflation goes over 4.5 to 5 percent, there is no way they can cut interest rates. Now, if it stays between 4 and 4.5 percent, there is a slight chance they could point out that these are supply side driven factors and therefore it could be discounted in terms of its relevance for monetary policy."

A Reuters poll of 18 analysts earlier this week was evenly divided between those expecting a cut and those expecting no change, though a majority of local bond market dealers surveyed by Reuters bet on a rate cut.

South Korea's annual consumer inflation in April hit a nearly 4-year high of 4.1 percent, staying above the central bank's target range from 2.5 percent to 3.5 percent for the fifth month in a row.

The central bank said in a statement that inflation was accelerating whereas economic growth would likely slow more than expected for the whole of this year, repeating its recent official stance, but did not provide any guide on future policy.

Conservative President Lee Myung-bak, who won December's election in a landslide with pledges to boost the economy, has said his government would do whatever it can to increase growth this year to 6 percent -- far above market expectations.

The central bank kept interest rate steady for the past eight months after raising it by a combined 1.75 percentage points in seven steps between October 2005 and August last year to rein in inflation and excessive money supply growth.