Bank of Korea Governor Lee Seong-tae and his board on Thursday voted to keep interest rates on hold, maintaining the record low of 2.00 percent - in line with expectations.
Before also holding rates at the March 12 meeting, 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 stable movements of international oil prices coupled with the easing of demand-pull pressures owing to the economic downturn and this trend seems set to continue for some time, the central bank said in a statement accompanying the rate decision. In the real estate market, prices and transaction volumes have continued to decline.
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 raising rates in August to combat inflation, the board had left interest rates at 5.00 percent for 11 straight meetings.
Financial market price variables such as the exchange rate and stock prices have shown some signs of improvement, the bank said. Lending to the household sector and SMEs has expanded steadily in line with the moderation in financial institutions' attitude to lending.
The BoK has said that the South Korean economy expanded by a seasonally adjusted 0.6 percent in the three months to September compared to the previous three-month period. It was the slowest rate of growth since the third quarter of 2004.
Then the economy shrank a seasonally adjusted 5.6 percent in the fourth quarter, suffering its second-largest economic contraction on record. For all of 2008, South Korea's economy grew just 2.5 percent, marking the worst performance since an annual contraction of 6.9 percent in 1998.
Domestic economic activity has kept on declining due to the continued decrease in both domestic demand and exports, but the pace of the slowdown has moderated somewhat, the bank said. The downside risk to economic growth is considered to remain as before at a high level because of the world-wide economic slump and the international financial market unrest.
The finance ministry has cut its GDP growth forecast for 2009 to a decline of 2 percent from a rise of 3 percent, while the IMF has predicted a 4 percent contraction. The central bank is scheduled to announce revised economic forecasts in its semiannual report on Friday.
The finance ministry has said that the economy may expand as much as 4 percent in 2010.
Looking ahead, the committee will maintain accommodative policy stance for the time being and do what is needed to ward off a severe slowdown in economic activity while giving support to financial market stabilization, the bank said.
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