Bank Of Korea Maintains Interest Rate At 2.75%

The Bank of Korea (BoK) Friday announced its decision to keep the policy rate at 2.75 percent but the market participants feel that additional stimulus measures are urgently needed to give a boost to the country's weakening economy.

The central bank noted that the growth in the U.S. has lost momentum and that the euro zone economy is contracting, with weaker exports to the major economies in turn bringing a slower growth in the emerging Asian economy this year.  At the same time, the BoK is expecting the economic slowdown to ease and the country’s economy to improve moderately.

This optimism has come after last month it was reported that South Korea’s industrial output rose in September compared to that in the previous month, ending the period of contraction for the last three months, indicating that there is hope that the country’s economy is reviving in spite of the soft global demand.

According to the data released Wednesday by the Korea National Statistical Office, industrial production, which measures the change in the total inflation-adjusted value of output produced by manufacturers, mines and utilities, rose 0.8 percent in September, up from a 0.9 percent decrease in August on a seasonally adjusted basis. In July and June, the industrial production dropped 1.9 percent and 0.6 percent respectively.

On yearly basis, the industrial output rose 0.7 percent in September compared to the same period last year, up from a 0.3 percent rise in August.

However, earlier this week, it was reported that South Korea's M2 Money Supply grew at a slower rate in September than that in the previous month, indicating that more monetary easing policies are necessary to increase the amount of currency in circulation, which in turn can result in reviving the country’s economic growth.  According to the data released this week by the BoK, the country’s M2 Money Supply, which measures the change in the total quantity of domestic currency in circulation and deposited in banks, grew 8.9 percent in September, down from 9.2 percent in August.

Last month the BoK cut the policy rate by 25 basis points to 2.75 percent.  Market players sense that the monetary policy should be loosened again sooner rather than later though the BoK has shown a preference for moving slowly. With South Korea having an inflation rate of 2 percent in September, which is below the central bank's 3.0 percent target limit, there should be room for further policy loosening.