S Korea holds rates steady citing turbulent markets

Sep 9, 2007 - South Korea's central bank held interest rates steady on Friday, as expected, saying inflation remained under control and it had to watch turbulent markets, convincing investors rates would stay on hold for some time.

The central bank left its overnight call rate target at a six-year high of 5.0 per cent after raising rates in July and August. The Bank of Korea joined several other major central banks that have kept borrowing costs steady in the face of global market turmoil.

Treasury bond futures prices jumped as much as 13 ticks after comments by Governor Lee Seong Tae bolstered market expectations that interest rates would not go up any time soon.

'The turbulence in international financial markets has not had any direct impact to the domestic economy,' Mr Lee told reporters. 'But there still is a good chance that international financial markets will become turbulent again.' All 11 economists recently surveyed by Reuters predicted rates would stay unchanged this week and a clear majority saw rates on hold until the end of the year.

The central bank cited its concerns that rapid credit and money supply growth would stoke inflation in the future as the main reason behind its rate increases in the past two months and earlier moves to tighten bank reserves.

But even as the central bank said it expected inflation to creep up in months ahead and the economy to maintain its growth momentum, its governor voiced confidence the bank had it under control.

Data published earlier this week showed that growth in Korea's broad money supply measure slowed in July while annual inflation in August came in at 2.0 per cent, below forecasts and the bottom of the central bank's 2.5-3.5 per cent target range.

Bank of Korea's decision came after several banks that only a month ago were widely expected to raise borrowing costs, decided to keep their rates on hold. The European Central Bank, the Bank of England and central banks in Australia and Canada all kept their benchmark rates steady this week.