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South Korea's Central Bank Holds Rates Steady

South Korea's central bank held interest rates steady at a record low for a fifth consecutive month on Thursday, in a widely expected move to support an only nascent recovery in Asia's fourth-largest economy.

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CNBC.com
Korea, Korean Flag

A media officer at the Bank of Korea informed reporters of the monetary policy committee's decision to keep the base rate unchanged at 2.0 percent, without elaborating. Governor Lee Seong-tae is due to hold a news conference later Thursday.

The central bank said in a statement that future inflation pressures could rise due to oil prices and that while the economy remained on a recovery trend uncertainties persisted.

Bond futures and stock prices held firm as investors bet the comment on inflation indicated no change from central bank's previous stance and that renewed doubts about the global economy's health would persuade the Bank of Korea to stand pat for an extended period.

The decision came hours after leaders of the Group of Eight industrial nations agreed in a meeting in Italy that the global economy's recovery was not yet assured and that it is too soon to unwind economic growth packages.

Analysts said low inflation and doubts about the economy would allow the Bank of Korea to refrain from shifting its monetary policy toward a tightening mode any time soon, although a recovering property market could emerge as a concern.

"Inflation pressures would not flare up quickly given the base effect, but rebounding property prices could be a headache for the central bank," said Jun Min-kyu, an economist at Korea Investment & Securities.

"I believe the central bank will begin to raise rates in December as the current level is extremely low. It is expected to adjust the rates to 3 percent at a gradual pace."

All 12 analysts surveyed by Reuters were unanimous in forecasting the Bank of Korea would hold the 7-day repurchase agreement rate steady after six reductions totaling 3.25 percentage points since October.

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But speculation has been increasing among investors and analysts that central banks in several Asian economies on a faster recovery could start to tighten up their policy even before the U.S. Federal Reserve changes its own.

The South Korean government and global investment banks have upgraded their forecasts on the country's economic growth for this year, citing an earlier and more solid recovery in exports and domestic demand than initially thought.