The chief of the South Korean central bank expressed confidence about the country's economic recovery on Wednesday, hinting that an interest rate hike may not be far away.
Bank of Korea (BOK) Gov. Kim Choong-soo made the remarks in a news conference after the central bank froze its key interest rate at 2 percent for the 15th straight month, amid heightened economic uncertainty stemming from fiscal problems in Europe.
"The Korean economy is on a marked recovery track although economic uncertainties over growth continue to linger, due mainly to the euro-zone debt crisis," Kim said.
"The monetary policy committee is keeping an eye on economic conditions, but we cannot wait until all economic variables reach a certain level (before adjusting our position)," he said.
Before the press conference, however, the BOK said in a statement that it will maintain its accommodative policy stance in a bid to help boost the economic recovery. But it dropped its customary "for the time being" for the first time in 14 months, hinting that conditions are growing riper for a rate hike.
"The reason why the BOK dropped the expression is that more economic data are reflecting that the economy is recovering," Kim said. "The central bank plans to take into account overall economic and financial conditions (in deciding the timing of a rate hike)."
The Korean economy, Asia's fourth-largest, has been recovering thanks to rising exports and improving domestic demand, sparking a debate over when the BOK should begin to hike the key rate.
The economy grew 1.8 percent in the first quarter from three months earlier, accelerating from a 0.2 percent on-quarter expansion in the fourth quarter of 2009.
The BOK upgraded its 2010 growth forecast for the Korean economy to 5.2 percent from an earlier projection of 4.6 percent. The government has put its economic growth estimate at 5 percent for this year.
The governor said chances are low that global economy will fall into a double-dip recession, as the U.S. economy is performing better than expected.
The International Monetary Fund said earlier that as the growth momentum of its economy is strong, there is room in the near term for South Korea to begin to normalize the key rate gradually.
South Korea's job markets are showing signs of thawing, an indication that the private sector is beginning to stand on its own. The country added 401,000 jobs in April from a year earlier, the largest increase in nearly 5 years.
Economists said the pace of the economic recovery and the BOK governor's tone indicate that the timing of a rate increase may come earlier than expected.
"The BOK signaled a gradual rate increase. I think today's rate-setting session at least seemed to scale back market players' bet that a rate hike may come next year," said Gong Dong-rak, a fixed-income analyst at Taurus Investment & Securities Co. He expected a rate hike in the third quarter.
Oh Suk-tae, an economist at SC First Bank, said that despite increased risks from the European debt crisis, the governor's hint at a rate increase means the BOK could raise borrowing costs if uncertainties ease. He forecast a rate hike in July.
The BOK slashed the rate by a total of 3.25 percentage points between October 2008 and February 2009 in an effort to put the brakes on a sharp economic freefall.//Yonhap
