RTTNews - Thursday, the Bank of Korea held its interest rates steady at a record low of 2% for a fifth consecutive month amid signs of an economic recovery and stable inflation. The central bank's decision came in line with analysts' expectations.
The domestic economic activity now appears to be emerging from its downward trend thanks to the proactive fiscal and monetary policy strive, the bank said in a statement accompanying the decision.
The bank also said that the slump in domestic demand and export has moderated. However, the bank warned that there still remains a high degree of uncertainty as to the economic growth path due to the rise in international raw material prices and the economic slowdown in the major advanced economies.
The BoK had pared rates by 25 basis points on October 9 and then slashed them again by 75 basis points in an emergency meeting on October 27. Then on December 11, the bank slashed rates by another 100 basis points in the largest rate cut in the bank's history - since it started adopting a benchmark interest rate in 1999. On January 9, the bank trimmed rates by 50 basis points to 2.50 percent.
Before holding rates in March, April, May and June meetings, the bank had trimmed rates by 50 basis points to 2 percent on February 12, marking the sixth rate cut in the previous four months.
Consumer price inflation has been decelerating thanks to the easing of demand-pull pressures owing to the economic downturn coupled with the downwardly stable exchange rate, the bank said today. The mild upward trend of real estate prices has continued.
The board members believe that economic conditions are improving and showing some stability, although concerns about credit risk continue to persist.
Looking ahead, the committee will maintain accommodative policy stance for the time being and do what is needed to bring about the continuation of the recent improving pattern of economic and financial movements, the bank said.
South Korea averted a recession in the first quarter by posting 0.1 percent growth, following a 5.1 percent contraction in the fourth quarter of 2008. The marginal GDP gain in the first quarter was largely attributed to an unprecedented government stimulus measures.
Since last year, the South Korean government has offered about $50 billion in fiscal stimulus and tax cut plans and sealed a $30 billion currency swap arrangement with the U.S. Federal Reserve to shield the country's economy from the global crisis.
A batch of economic data has raised hopes of recovery in Asia's fourth-largest economy. Industrial output rose for a fifth month in May and exports rebounded in June from the previous month, while headline inflation fell to a 22-month low.
In addition, consumer confidence jumped to the highest in almost two years in June and bank lending to households rose by the most since December 2006.
South Korea's Finance Ministry predicted a 1.5 percent contraction in GDP this year, better than its previous forecast for a 2.0 percent drop, reports said on June 25. The central bank is set to revise its 2009 GDP forecast for a 2.4 percent decline on July 10.
Yesterday, the International Monetary Fund said the global economic rebound next year will be stronger than it forecast in April, as the financial system stabilizes and the pace of contractions from the U.S. to Japan moderates.
Earlier this week, the International Monetary Fund upgraded forecasts for the South Korea's gross domestic product in 2009, saying that the stimulus measures implemented by the country's government helped to curb its economic downturn.
The IMF now forecasts the economy to contract 3% this year, revised up from a 4% shrinkage it predicted in April.
The South Korean central bank followed its counterparts in Australia and Europe, where borrowing costs were kept at historic lows in the past week to support their economies. The Bank of England is widely expected to leave its rate at 0.5 percent later today.
Following the South Korean central bank's decision to leave rates unchanged, the won recovered from a 9-day low of 1282.60 against the dollar. Currently, the dollar-won pair is trading at 1278.05 and this may be compared to yesterday's close of 1275.70. The near term resistance level for the Korean currency is seen at 1265.8.
On the equity front, the Korean market is trading higher today and the benchmark index KOSPI is currently trading with a gain of 4.77 points or 0.33% at 1,436.06.
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