South Korea freezes key interest rate for 10th month

South Korea's central bank Thursday froze its key interest rate at a record low 2.0 percent for a 10th month, saying uncertainties remain about the pace of the country's economic recovery.

At its monthly policy meeting, the Bank of Korea kept the benchmark seven-day repo rate unchanged. It had cut the rate by a total of 3.25 percentage points between October 2008 and February to bolster the economy.

"Exports and consumption have continued to improve. There still, however, remains uncertainty as to the economic growth path," the bank said in a statement.

"There is a considerable degree of uncertainty over the actual growth path."

Governor Lee Seong-Tae said the central bank would consider raising interest rates gradually, citing a "bright" outlook for growth next year.

The economy is forecast to grow between four and five percent next year, he said, stressing the need to prepare for a gradual tightening of rates.

He said South Korea should act "preemptively on its exit strategy" from the economic crisis because it could be too late if it waits for clear evidence of a recovery.

"We must move closer to the exit if we want to get out at a proper time," the governor said.

He predicted inflation would remain generally stable but expressed concern about a continued rise in household debt and mortgage lending.

Official data showed the rise in property prices had slowed and mortgage lending had grown on a similar scale to last month.

A series of economic numbers has fuelled optimism that Asia's fourth largest economy is quickly pulling out of the global downturn.

The economy grew 3.2 percent in the third quarter from three months earlier, the fastest quarterly expansion in more than seven years, thanks to improving domestic demand and brisk exports.

The International Monetary Fund, in its latest estimate this week, raised its forecast to 0.25 percent GDP growth this year, up from October's projection of a 1.0 percent decline.

For 2010 it predicted an expansion of 4.5 percent, up from the previous 3.6 forecast.

But President Lee Myung-Bak at an economic seminar Thursday warned against complacency.

"There is a growing view that prospects for next year are somewhat positive, but I believe there are still too many uncertainties in the global economy," he said.

"I believe we must not be complacent, at least until the end of the first half of next year, and (should) preemptively implement budget spending that will help stimulate the economy."

Alaistair Chan, associate economist with Moody's Economy.com, said South Korea has seen the swiftest rebound in the region but slower growth is possible in late 2010.

The medium-term outlook is highly uncertain because of slow industrial output growth and weak consumer and business sentiment, he said in a commentary.

"We suspect this is why the Bank of Korea has widened its inflation target range for the period from 2010 to 2012," he said. AFP