Bank of Korea leaves interest rate at 2.25 percent

SEOUL, South Korea — South Korea's central bank left its key interest rate unchanged Thursday for the third straight month in a surprise move as concern about potential exchange rate risks to the global economy offset worries about domestic inflation. The Bank of Korea announced that it kept the benchmark seven-day repurchase rate at 2.25 percent at a monthly monetary policy meeting. The BOK had left the rate at a record low 2 percent for 17 months in response to the global economic downturn before raising it to 2.25 percent in July amid a strong domestic expansion and worries about rising prices. Analysts had expected another increase. A total of 11 economists at 14 financial institutions surveyed by Yonhap Infomax, the financial news arm of Yonhap news agency, predicted the bank would increase the rate to 2.5 percent. The BOK's monetary policy committee, however, signaled in a statement released after the decision that now was not the time to increase borrowing costs. "Looking ahead, there exists the possibility of the heightened volatility of economic activity and exchange rates in major countries acting as a risk factor for the global economy," said the committee, which is chaired by Gov. Kim Choong-soo. Global worries over exchange rates have taken center stage amid an inability by leading economies in the Group of 20 nations to reach agreement on how to avoid potentially destabilizing devaluations as countries where currencies have risen sharply, such as Japan, take steps to weaken them. The dollar remains weak amid the poor outlook for the U.S. economy and the Federal Reserve's policy of keeping its key interest rate near zero. China's tightly controlled yuan, meanwhile, has not risen as much as critics in the U.S. and Europe say is necessary to match the country's emergence as a major economy. The rate decision also comes as South Korea, Asia's fourth-largest economy, has shown signs of weakening. Though the overall outlook remains strong for this year, growth in the three months ended June 30 slowed to a revised 1.4 percent from 2.1 percent in the previous three months. The International Monetary Fund last month raised its 2010 growth forecast for South Korea's economy to 6.1 percent from 5.75 percent, but predicted the expansion would slow to 4.5 percent next year. South Korea has rebounded strongly from the global financial crisis and downturn to grow six straight quarters, boosted by the low interest rate, government stimulus spending and robust exports. The economy contracted in the final six months of 2008 amid the crisis and managed growth of just 0.2 percent for all of 2009. The BOK's move to keep the rate on hold came as the Reserve Bank of Australia last week left its main interest rate unchanged at 4.5 percent for the fifth consecutive month in a surprise decision. The Bank of Japan, meanwhile, cut its key rate to virtually zero last week, also in a surprise move, as it tries to boost its faltering economy. As it has in recent months, the BOK's monetary policy committee also reiterated worries about inflation, noting in the statement that "upward pressures" were unlikely to abate. South Korea's consumer price index surged to a 17-month high last month amid more expensive food prices caused by bad weather. — AP