Bank of Korea keeps interest rate at record low

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SEOUL, South Korea (AP) — The Bank of Korea left its key interest rate at a record low Friday after the government muscled in on the central bank’s policy meeting, invoking a seldom used right to underline its concern that higher borrowing costs could derail the economic recovery.

The decision to leave the benchmark seven-day repurchase rate at 2 percent for the 11th straight month was widely expected, though South Korea’s rapidly recovering economy appears increasingly capable of withstanding higher interest rates.

South Korea’s finance ministry, which has been cool to the prospect of rate hikes, exercised its right to sit in on the policy meeting for the first time in a decade, sending Vice Minister Hur Kyung-wook as an observer.

The Ministry of Strategy and Finance said in a statement Thursday announcing its decision to attend policy meetings this year that it respects the BOK’s independence but emphasized “the need for policy coordination between the government and central bank during times of economic crisis.”

The bank slashed the benchmark rate six times starting in October 2008 to help battle the impact of the global slowdown, but has left it unchanged since last March as the economy stabilized and began to recover.

Asia’s fourth-largest economy has recorded three straight quarters of growth largely on a rebound in exports and manufacturing after contracting in the final three months of 2008.

In a statement Friday, the bank’s monetary policy committee said South Korea’s recovery is expected to continue, though cited “the risk of delay in a full-fledged recovery of the major advanced economies” as a concern.

The committee added it “will maintain the accommodative policy stance for the time being in such a way as to help sustain the trend of recovery in economic activity.”

South Korea’s economy grew 3.2 percent in the third quarter, its best performance in more than seven years, compounding optimism for strong growth in 2010.

The central bank said in a report last month it expects the economy to grow 4.6 percent this year, compared with an expected 0.2 percent expansion in 2009, and grow a further 4.8 percent in 2011, bolstered by a global recovery and better sentiment among consumers and investors.

Economists agreed that rates are destined to move higher, but differed on the timing.

Kwon Goohoon, economist at Goldman Sachs in Seoul, said in a report Friday that the BOK’s decision reflected the government’s concerns about any rate increase during the first half of this year.

Leaving the rate unchanged was in line with the government’s position that “the current expansionary policy needs to be maintained and the exit policy needs to be undertaken step by step only when recovery trends are firmly established,” he said.

Goldman Sachs, which had expected a quarter percentage point rate hike during the first quarter, changed its view, with Kwon saying that the BOK will now most likely wait until the third quarter barring any unusual acceleration in the economy or sharp rise in inflation.

But Alaistair Chan of Moody’s in Sydney said he expects a rate increase before BOK Gov. Lee Seong-tae’s tenure concludes at the end of March.

“Inflation is creeping higher and will continue to do so, driven by rising fuel costs and increased consumer spending,” he wrote in a report.

Central banks worldwide including the U.S. Federal Reserve slashed interest rates to cope with the global financial crisis and economic downturn, though few have dared raise borrowing costs for fear of snuffing out budding recoveries.

In the Asia-Pacific region, only the Reserve Bank of Australia has so far been confident enough, lifting its cash rate three times late last year to 3.75 percent.

The Bank of England left interest rates at a record low of 0.5 percent on Thursday and announced no change in its monetary stimulus program as it looks for clearer signs on the health of the economy.