Finance counsels

South Korea’s central bank kept its benchmark interest rate unchanged at a record low and signaled it may keep borrowing costs on hold as home loans slow and it gauges the strength of the economic recovery.

Governor Lee Seong Tae left the seven-day repurchase rate at 2 percent in Seoul today and said the Bank of Korea “will maintain an accommodative policy stance for the time being and do what is needed to bring about the continuation of the recent improving pattern of economic movements and financial market stabilization.”

The outlook is a U-turn from September, when Lee signaled he may act to stem rising property prices and mortgage lending, triggering speculation that interest rates would increase as early as November. The central bank today said those concerns had eased as borrowing slowed.

“This statement suggests that the Bank of Korea is putting some faith in the ability of the authorities to cool down the real estate market without hiking overall rates,” Frederic Neumann, senior Asia economist at HSBC Holdings Plc in Hong Kong, said in a note. “The official statement, surprisingly, appears more dovish than the previous one.”

South Korea’s financial regulator said yesterday it plans to further tighten regulations on non-banking finance companies’ lending to households starting Oct. 12. The loan-to-value ratio in mortgages will be lowered to 50 percent from 60 percent in parts of Seoul, the Financial Supervisory Service said.

Consumer Borrowing

Low interest rates have spurred consumer borrowing, with bank lending to households expanding for a seventh straight month in August before falling in September. Loans to households climbed 3 trillion won ($2.6 billion) to 405.1 trillion won in August and fell 1 trillion won in September, the Bank of Korea said.

Governor Lee, speaking after the last review on Sept. 10, said the central bank would “consider a revision” to policy direction should signs emerge that the monetary easing isn’t appropriate payday loan company.

The currency reached the strongest level in a year today on speculation the central bank would signal plans to raise rates. The won was little changed after the decision. Korean bonds rose, bringing the yield on the benchmark three-year note down by 9 basis points to 4.4 percent, according to the Korea Stock Exchange.

Threat to Recovery

Finance Minister Yoon Jeung Hyun earlier this week warned that unwinding economic stimulus policies too soon would “impede” the recovery.

The central bank cut the benchmark interest rate by 3.25 percentage points from October to February, the most aggressive easing since the bank began setting a policy rate a decade ago, to cushion the economy from the global recession. The government also increased spending this year to support demand.

The economy expanded 2.6 percent in the second quarter, the fastest pace in almost six years, and the benchmark Kospi stock index has risen more than 40 percent this year.

“The recent improving trend in real economic activities has been maintained,” the central bank said in a statement today. “In the coming months, the Korean economy is likely to maintain its positive growth,” helped by the improvement in the world economic environment and as companies rebuild inventories, it said, adding that “a number of uncertainties surround the actual pace.”

The Bank of Korea’s decision came as other central banks begin to indicate a willingness to raise rates. Federal Reserve Chairman Ben S. Bernanke said yesterday the central bank will be prepared to tighten monetary policy when the outlook for the U.S. economy “has improved sufficiently.”

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