South Korea leaves rates on hold


South Korea's Kospi stock market index is down about 28 percent so far this year

Staff and wires

SEOUL, South Korea -- South Korea left interest rates on hold Tuesday as worries grow in Asia about the impact on exports from the slowdown in the United States.

The decision by the central Bank of Korea to keep interest rates low was expected.

Australia's Reserve Bank, which likewise met Tuesday to discuss interest rates, is also tipped by analysts to leave rates unchanged.

It will signal any change on Wednesday morning, but the recent weak data out of the U.S. and the turbulence in equity markets has made central bank governors in the region wary of lifting rates too quickly.

Australia last moved its official cash rate in early June, lifting it a quarter of a percentage point to 4.75 percent(Full Story).

Australia and South Korea are the two fastest-growing advanced economies in the region, with their gross domestic product expanding at better than 4 percent and 6 percent respectively.

In Seoul, the Bank of Korea's seven-member monetary policy committee left the overnight call rate target unchanged Tuesday at 4.25 percent, near a record low.

It is the third straight month of no change.

Turbulence in the U.S.

"The U.S. economy is experiencing a greater turbulence, unnerving the local stock market and thus magnifying concerns over an economic downturn," Governor Park Seung, who also heads the committee, told reporters.

South Korea's benchmark Kospi stock index is down around 28 percent from its high in April. It closed Tuesday at 673.78, down 0.3 percent.

But Park reaffirmed a high growth rate for Asia's third-largest economy is still likely.

"Even in case of a U.S. double-dip recession, which is the worst scenario case for Korea, I believe six percent growth (this year) is attainable," Park told reporters.

He did not rule out the possibility of a downgrade in the bank's official 2002 growth forecast of 6.5 percent, after three percent growth last year.

Many economists say rates could be on hold for the rest of the year.

Consumer spending peaking

Consumer spending, the main engine of growth for now, has shown signs of peaking in recent months. The BOK said in a report on Tuesday that M2 money supply growth slowed in July due to weaker household lending.

Park also said the 2002 current account surplus could come in at $4 billion, below a target of $5 billion, while inflation would be kept at three percent.

Consumer prices are not seen as an immediate threat.

The producer price index, a measure of wholesale prices, fell 0.2 percent in July from a month ago as rising supplies trimmed food prices, the BOK said in a separate report on Tuesday.

An 11 percent gain in the Korean won from a low in mid-April has also helped ease inflationary pressures as it brought down import costs.

The PPI data followed a report last week showing July's consumer price index, the broadest gauge of inflation, fell 0.3 percent from a month earlier, helping take pressure off policy makers to raise interest rates.

Customs-cleared exports posted their strongest jump in 22 months in July to $13.7 billion on better sales of chips and mobile phones.

But a key business confidence index fell for a third straight month to 100.4 points after reaching a record 143 in May.

Reuters contributed to this report.