South Korea's central bank on Tuesday held interest rates at a record low 2.0 percent for the third month in a row, as expected, but sparked a bond rally by promising to keep to an easier policy stance for the time being. It forecast mildly positive quarterly growth in coming months for an economy that just avoided recession in the first quarter but said policy needed to remain supportive because prospects were very uncertain in the face of the global downturn.
"Looking ahead, the Committee will maintain an accommodative policy stance for the time being and do what is needed to give support to economic recovery while helping bring about financial market stabilisation," the Bank of Korea said in a statement referring to its Monetary Policy Committee that sets rates. "The downside risk to economic growth is thought to persist because of the sustained world-wide economic slump and the deterioration of labour market conditions," it added.
The central bank's comments dampened some expectations that after an unprecedented spree of rate cuts since the global crisis blew up last September, rates would rise this year. The yield on benchmark five-year treasury bonds dropped 10 basis points to end at 4.51 percent. Like other Asian exporters, South Korea was hit hard by the collapse in global trade but recent data has shown signs that the worst may be over.
Bond prices have dived since the middle of February, when the central bank last cut rates, partly on expectations of a rise in government bond sales to fund economic stimulus plans and speculation rates could rise this year as the economy improves.
One-year treasury bond yields have risen to 2.61 percent from a record closing low of 2.12 percent on February 13. "The BoK made it clear it will not raise rates in a hurry, providing big relief to debt investors," said Kim Dong-whan, a fixed-income analyst at HI Investment & Securities. Other central banks have moved to calm expectations for rate rises, including in New Zealand which pointedly told markets its rates would stay low until late in 2010.
Analysts said the Bank of Korea would probably keep rates at currents levels for at least the rest of this year until it is confident the global economy has turned around. A Reuters poll after the rate decision showed that nine out of 10 analysts believe the policy rate has hit a bottom and will be raised by the middle of next year, a Reuters poll showed. Three said a rate rise would happen this year.
The won fell slightly on Tuesday, more concerned about the potential for official intervention to curb recent strength in the currency, while stocks fell amid a broad sell off in global stocks. Before the central bank meeting, all 12 analysts in a Reuters poll had forecast no change in rates, judging that both the economy and financial markets had stabilised but a strong recovery was not yet in sight.
The Bank of Korea slashed its policy rate, the 7-day repurchase agreement rate, by 3.25 percentage points between October and February in tandem with other central banks to combat the biggest global downturn in decades. South Korea barely averted a recession, defined by two consecutive quarters of economic contraction. The economy expanded a seasonally adjusted 0.1 percent in the first quarter after shrinking 5.1 percent in the fourth quarter.
Business and consumer sentiment has returned to pre-crisis levels as exports and industrial output have showns signs of picking up following a slump, sparking hopes of a turnaround in Asia's fourth-largest economy. But the central bank remained cautious about the outlook.
"The economic outlook has not worsened over the past one or two months but has not improved significantly either," Governor Lee Seong-tae told a briefing. "The situation where the economy is neither contracting nor recovering sharply will persist for a while. There are still many uncertainties around."
It said fast growth in short-term liquidity was a concern, but not enough to prompt a policy response. The reserve base, the narrowest measure of money supply, rose more than 45 percent in the year through March, the fastest pace in nearly 20 years, reflecting central bank injections of cash into the financial system.