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South Korea freezes interest rate for third month

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South Korea’s central bank Thursday left its key interest rate  unchanged at 2.25 percent for a third month, citing a possible global economic slowdown and tensions over international exchange rates.

Bank of Korea governor Kim Choong-Soo and fellow policymakers again froze the benchmark seven-day repo rate, which was raised in July by 25 basis points from a record low.

The central bank said in a statement the local economy appears set to register “solidly-based” growth in coming months, helped by brisk exports and increasing consumption and facilities investment, but risks remained.

“The possibility of a slowdown in the pace of economic recovery of major countries, change in the setting of global exchange rates and the fiscal problems of European countries will act as downside risk factors,” it said.

The reference to exchange rates was a new addition to the policy statement, amid heated currency disputes between the world’s leading economic powers.

China has come under repeated attack from the United States and European nations, which say it is keeping the yuan artificially low to help exporters.

South Korea itself came in for criticism from Japan Wednesday.

Finance Minister Yoshihiko Noda told a parliamentary session in Tokyo that South Korea’s role as chair of next month’s G20 summit would be “seriously questioned” because of its “repeated interventions” to weaken the won.

Prime Minister Naoto Kan separately called on China and South Korea to “act responsibly” and avoid pushing their currencies lower.

Central bank governor Kim said increased global foreign exchange volatility poses a potential threat to South Korea’s economy, and that was taken into account during the policy board meeting.

“Global financial market conditions are swiftly changing… there is a possibility that heightened currency volatility is likely to work as a downside risk,” he told a press conference.

External economic conditions are important for (export-dependent) countries like South Korea.”

The central bank said inflation was likely to maintain an upward trend of above three percent on an annual basis, as demand-side pressures rise and international raw material prices increase.

It said the current account, the broadest measure of trade in goods and services, was expected to continue posting surpluses.
Source: AFP

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