By Kim Jae-kyoung, Lee Hyo-sik
Staff Reporters
There were no surprises at the nation's central bank Thursday ― as widely expected, Bank of Korea (BOK) Governor Lee Seong-tae left the key interest rate untouched at the record low level of 2 percent for the 13th consecutive month, leaving the reins of monetary policy in the hands of the next BOK chief.
Lee, known as an inflation fighter, was widely expected to freeze the rate at his last monetary policy committee meeting to avoid getting embroiled in another showdown with government officials who have been pressing the central bank to keep borrowing costs low.
But Lee hinted once again at an increasing of the rate in the not too distant future, saying a consensus toward ending the accommodative monetary policy is building among committee members.
"The Korean economy is expected to expand by 4 to 5 percent this year from 2009, with consumer prices rising 2.5 to 3 percent. Keeping the interest rate at 2 percent definitely reflects our accommodative policy stance and it will likely continue for the foreseeable future," Korea's top central banker said.
Lee then said the committee is increasingly leaning toward ending the eased policy position. "We are currently in the process of reaching an agreement among our members on when to raise the rate," he said.
The key rate has been frozen since March last year, putting the brakes on its monetary easing cycle that trimmed it by 3.25 percent since October 2008 in the aftermath of the global financial crisis.
However, analysts said that with Lee stepping down in April along with two other monetary policy committee members, it is widely expected that no rate increases will come in the months to come. They expect the central bank to start raising key rates from the third quarter.
"The chance of a rate hike in the second quarter has diminished as we expect the new members to take a wait and see attitude," Morgan Stanley senior economist Sharon Lam told The Korea Times.
"Since there was no rate hike in the first quarter as we had expected, we are now trimming our rate forecast from a total of 125 basis point hike for 2010 to 100 basis points, with the first rate hike expected in early third quarter," she added.
HSBC senior Asia economist Frederic Neumann also said that Lee's exceedingly dovish stance indicates no rate increase in the near future.
"Governor Lee sounded less hawkish at his last press conference and a rate hike appears unlikely until the third quarter. We'd rather see rates go up earlier, but, in terms of data, there's no "smoking gun" that could justify a hike soon," he said.
As for his four-year term as the BOK head, Lee said he worked hard to stabilize consumer prices and help the economy expand at a sustainable pace. "From 2006 through 2007, I tried to curb rises in real estate prices, and deal with a massive inflow of foreign capital and the consequent strengthening of the won against the dollar. It was unfortunate that the Korean economy was hit hard by the global financial crisis in late 2008."
For the past four years, he has experienced the ups-and-downs of the Korean economy. Before the collapse of Lehman Brothers in September 2008, he was a fierce inflation fighter who placed top priority on curbing rises in consumer prices.
But following the global financial crisis, he engineered an unprecedented rate-cut campaign to push down the nation's borrowing costs to an all-time low of 2-percent in just five months to help Asia's fourth-largest economy deal with the worldwide slump.
With the Korean economy recovering at a faster-than-expected pace in mid-2009, Lee had hinted at raising the interest rate to prevent a possible property market bubble and other side effects of cheap borrowing costs, inviting strong protests from Strategy and Finance Minister Yoon and other senior policymakers.
They have been urging the central bank to leave the interest rate untouched until a genuine and sustained economic expansion is seen.
Additionally, Vice Strategy and Finance Minister Hur Kyung-wook has been attending the BOK monetary policy meeting since January, becoming the first senior finance ministry official to do so in 11 years. The move is seen by many as the government's attempt to rein in the central bank, hurting its neutrality.