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Bank of Korea Freezes Interest Rate for 8th Month

Posted October. 10, 2009 07:50,   


The Bank of Korea yesterday froze its key interest rate for the eighth straight month, citing uncertainty in economic recovery and slowing real estate inflation.

Bank governor Lee Seong-tae also hinted at raising the rate next year, leading to expectations that the government will not implement an exit strategy this year. As a result, the domestic stock market saw a rally in the afternoon.

At the monthly meeting of its Monetary Policy Committee, the bank kept its key interest rate at two percent.

“We will maintain a strong monetary stance for the time being,” Lee later told reporters. “While monitoring our economic growth, the conditions of advanced economies, and the commodity markets after the fourth quarter this year, we will focus on revitalizing the economy and stabilizing the financial market.”

He also said his comment made at a committee meeting last month was misinterpreted as a hint at an increase. “We still believe that the current interest rate is part of a strong monetary easing, but such a comment was not a signal for an interest rate hike the following month,” he said.

Lee toned down his warning against rising housing inflation, saying, “The pace of housing inflation has slowed since mid-September. If additional measures by regulatory authorities produce results, monetary authorities can significantly be relieved of their burden.”

Experts say the bank’s softening of its emphasis on a rate increase is partly because of the government’s repeated stance that an exit strategy is premature.

Though Lee stuck to his stance on the need for a rate increase, many members of the committee apparently felt burdened by the government’s opposition to a hike.

Stocks soared on expectations of a delay in an exit strategy. The benchmark KOSPI rose 31.33 points (1.94 percent) to close at 1,646.79 after Lee made his comments.

Bond rates plummeted the same day, however. The yield on the five-year government bond dropped 0.04 percentage point from the previous day to 4.77 percent, and that of the three-year government bond fell 0.11 percentage point to 4.36 percent.

jaeyuna@donga.com jarrett@donga.com