The Bank of Korea announced that it decided to leave the benchmark seven-day repurchase rate at 2.5 percent during a monthly monetary policy meeting. The bank last month raised the rate from 2.25 percent, which was the second hike in four months.
South Korea’s inflation rate hit 4.1 percent in October.
The year-on-year increase in consumer prices was slightly outside the central bank’s comfort zone. The bank’s inflation target is 3 percent, though that includes what it calls a “tolerance range” of plus or minus 1 percentage point.
Inflation dropped to 3.3 percent in November.
The bank’s monetary policy committee welcomed the slowdown, but warned the trend is for rising prices to continue.
“Consumer price inflation has greatly decreased due to the stability of vegetable prices,” the committee said in a statement. “However, upward pressures are expected to continue, being associated with the continued upswing in activity and the run-up in international raw material prices.” South Korea’s benchmark stock index rallied 1.7 percent to close at 1,988.96, its highest finish in three years, amid broad gains in regional markets.
The bank’s policy makers also expressed optimism about South Korea’s economy, saying they expect it to show continued strength “even in the presence of external risk” including global financial market turmoil caused by sovereign debt problems in Europe.
South Korea, Asia’s fourth-largest economy, has recovered strongly from the global financial crisis that began in 2008. The International Monetary Fund expects South Korea to grow 6.1 percent this year after last year’s meager 0.2 percent expansion.
Bank of Korea Gov. Kim Choong-soo told reporters Thursday that South Korea’s economy was likely to grow about 6 percent this year, but would slow in 2011, according to Kim Seong, a bank spokesman.
The Bank of Korea had aggressively cut the interest rate a total of 3.25 percentage points to a record low 2 percent between October 2008 and February 2009 as it worked with other central banks to fight the crisis and subsequent economic downturn.
The bank’s monetary policy committee raised the borrowing cost to 2.25 percent in July amid solid growth prospects for the domestic economy and inflation concerns.
Kwon Goohoon, economist at Goldman Sachs in Seoul, said in a report released after the decision that the central bank will likely raise the interest rate by a full percentage point next year with the first hike of a quarter point probably coming in February.
“Given the need to avert increases in inflation and inflation expectations in 2011, we expect a front-loaded rate normalization,” he wrote, with an increase of three quarters of a percentage point in the first half and the remaining quarter point in the second half.
Thursday’s decision was widely expected and followed similar moves this week by central banks in New Zealand and Canada.
New Zealand’s central bank held its key interest rate at 3 percent Thursday amid concern the weak economic recovery from recession has slowed in recent months. Canada’s central bank, meanwhile, left its benchmark rate at 1 percent Tuesday, saying risks to the global economy have increased.
