Korea leaves key rates unchanged

Korea is targeting growth of 5.3 percent this year, but some economists think this is too optimistic

SEOUL, South Korea -- South Korea's central bank left interest rates unchanged at its monthly policy board meeting on Thursday.

The bank said it would keep its overnight call rate at 5.0 percent because inflation had been above target for five months.

The central bank's decision was widely anticipated and had little impact on financial markets.

The Korea Composite Stock Price Index closed 3.48 points, or 0.58 percent, higher at 601.14. The won traded at 1,286 to the U.S. dollar late on Thursday.

The central bank raised the possibility its 2001 inflation target could be missed.

Consumer price index flat in May

The consumer price index, the broadest measure of inflation, was flat in May compared with April after rising for five straight months.

Year-on-year, the index was up 5.4 percent, driven by high public service charges, high oil prices and the depreciation of the Korean won, the bank said.

The central bank has targeted an average CPI rise of 3.7 percent in 2001 compared with 2.3 percent in 2000. It has targeted core inflation - which strips out agricultural and energy costs - at two to four percent for this year.

Bank of Korea Governor Chon Chol-hwan blamed an ongoing drought for the deteriorating outlook for prices.

Concerned about protracted drought

"I am greatly concerned about the protracted drought driving up vegetable prices," Chon said.

"Future inflation depends largely on the weather and it is possible we cannot control inflation within this year's target."

"What worries us is that many of the factors stimulating inflation, such as crude prices and weather, are not under our control," Chon said.

He said uncertainty about the economy grew in June from May as the outlook for the global economy, and especially the U.S. economy, had unexpectedly turned gloomier.

"It is still too early to say what the central bank can do now to address worries about an economic slowdown," Chon said. "But things are more pessimistic this month than in May."

Still room for a cut later this year

The central bank last lowered its target for the key short-term call rate in February, when it cut the overnight rate by 25 basis points to five percent as the economy showed signs of stalling following growth of 8.8 percent last year.

The government's economic growth forecast for 2001 is 5.3 percent, but some economists believe this is too optimistic and suggest growth could fall to about 2 percent.

Quarter on quarter growth in March was only 0.3 percent.

Economists polled by Reuters earlier this week say that with consumer demand remaining soft, the bank has room to cut rates later this year.

"I think the BOK is likely to cut the call rate in the second half of the year because the rise in the consumer price index is expected to stabilise at the three percent level in the fourth quarter," said Shin Dong-suk, economist at Samsung Securities.

"I'm still maintaining the view that the call rate should be cut by 50 basis points in the second half," he said.

Reuters contributed to this report.