S. Korea's central bank retains key rate for fourth month

Despite soaring property prices, South Korea's central bank on Thursday froze its key interest rate for a fourth straight month in December in an apparent move to kick-start the economy.

In its monthly rate-setting session, seven policymakers at the Bank of Korea (BOK) retained the December target for the call rate at 4.5 percent, a five-year high. The call rate refers to the interest charged on overnight inter-bank loans.

The central bank also decided to boost the required reserve ratio on foreign currency demand deposits by two percentage points in an apparent bid to curb market liquidity.

"Unless some downside risks such as U.S. economic growth, oil prices or North Korean nuclear risks move out of line with our expectations, the economy will post a resilient recovery next year," BOK Gov. Lee Seong-tae told reporters after the rate session.

"After sluggish economic activity in the second half of this year, economic growth will gather momentum in 2007."

The rate freeze was in line with analysts' expectations.

According to a poll by Yonhap Infomax, the financial news arm of Yonhap News Agency, 14 out of 16 analysts predicted a rate freeze.

The central bank has kept its interest rate unchanged since September in order to jump-start a sputtering economic recovery, a month after boosting the rate by 0.25 percentage point.

In 2007, South Korea's economic growth is expected to slow to 4.4 percent on an annual basis from an expected 5 percent advance this year due to cooling exports and private spending, the central bank said Tuesday in its semiannual forecast.

The central bank had little reason to boost its key rate to curb housing prices, as it ordered lenders to increase reserve requirements in late November, analysts said.

Using a rate hike to curb home prices would be too much of a burden for the economy since the rate decision has a wide-ranging impact on the whole economy.

The central bank, however, decided Thursday to boost the required reserve ratio on foreign currency demand deposits to 7 percent from 5 percent.

A reserve ratio hike makes it difficult for lenders to extend household loans, and potentially curbs home prices.

Property prices have been a key concern for the government, as they could undermine the much-awaited economic recovery. According to Kookmin Bank, South Korea's housing prices grew at the fastest pace in more than 16 years in November, a factor that may undermine the much-awaited economic recovery.

The government announced a set of measures to rein in soaring home prices in mid-November, including regulating home-backed loans and boosting the housing supply.

Upward pressure on real estate prices has slowed thanks to the government's measures, but the central bank will keep a close eye on apartment prices as there is still notable upward pressure in the market, Lee said.

An unexpectedly sharp ascent of the Korean currency to the U.S. dollar also gave the bank little reason to hike the rate, as the move can further fuel the ascent, analysts said.

On Wednesday, the won set another nine-year high against the U.S. dollar as investors dumped the greenback on expectations that the U.S. Federal Reserve may cut its rate early next year to counter an economic slowdown.

A stronger Korean currency makes South Korean goods more expensive, eroding exporters' price competitiveness.

South Korea's tame inflation also seems to have led to the rate freeze, the analysts said.

South Korean consumer prices declined by the greatest amount in a year in November as fuel costs fell, the state statistics office said Friday.

Seoul, Dec. 7 (Yonhap News)