Bank of Korea holds rates, tones down inflation rhetoric

The Bank of Korea held interest rates steady for the fifth successive month on Friday, as expected, as data showed consumer debts in Asia's fourth-largest economy had increased sharply from a year ago. Economists said that while the South Korean central bank had toned down its rhetoric on inflation, it was too early to expect the bank to start easing even after Indonesia's central bank dramatically cut its main rate by 50 basis points on Thursday in response to the global economic slowdown.
Governor Kim Choong-soo told a news conference there had been no discussion of a cut in the 3.25 percent seven day repurchase rate at Friday's meeting, and sought to play down the risks of an imminent collapse in the euro zone, where debt woes are roiling global financial markets.
Inflation in South Korea dipped below the central bank's 2-4 percent target range in October for the first time this year and growth in one of Asia's most export-dependent economies slowed in the latest quarter. "We believe that rates will stay at 3.25 percent for the rest of this year. If the euro zone problems remain unsolved and increase anxiety in financial markets, one rate cut is expected in the first quarter next year," said Kim Ji-hyun, an economist at Tong Yang Securities in Seoul.
Although South Korean exports have slowed in recent months along with the global economy, they are still increasing, though slow wage growth has meant that consumers in this country of 50 million have become more indebted. The latest data showed that the ratio of household debt to disposable income rose to 158.5 percent this year from 151.6 percent in 2011. South Korean consumers are more indebted relative to incomes than those in the United States, official data showed.
Although the central bank warned in a statement after the decision that it was concerned inflation and inflationary expectations would remain high, it dropped a reference in the statement about putting more emphasis on ensuring price stability. That indicated a shift in its rate "normalisation" policy as the global economy cools and the risks of financial contagion from the euro zone rise. Nomura economist Young Sun Kwon, who was among the first to predict the end of Bank of Korea's tightening cycle earlier this year, said after Friday's decision that he had pushed back his expectations of a rate hike to July 2012 from February.