BOK keeps rates on hold as economy bottoms out

Bank of Korea (BOK), South Korea's central bank, kept its benchmark interest rate on hold at 2.75 percent on Friday as the economy showed signs of bottoming out seen in the recently released economic indicators. Governor Kim Choong-soo and the monetary policy board members decided to leave the 7-day repo rate unchanged at 2.75 percent at the first rate-setting meeting of 2013. The BOK resumed its monetary easing cycle by lowering the borrowing costs by 25 bps in July and October each, before maintaining a wait-and-see stance for three straight months. The January policy decision was in line with market consensus as most experts predicted the rate freeze, citing positive economic data related to production and domestic demand, headline inflation staying at a low level and the expected fiscal stimulus in the first half. Economic indicators unveiled in the past month confirmed the South Korean economy bottomed out in the third quarter. Production in the mining and manufacturing sectors expanded 2.3 percent on- month in November after the mild gains of 0.7 percent in September and October. "The gradual recovery in exports has positively affected industrial production, supporting our view that exports were likely a key driver of the recovery in industrial output and GDP growth in the fourth quarter of 2012," said Oh Suktae, an economist at Standard Chartered in Seoul. Growth in the export-oriented electronics sector accelerated to 6.6 percent in November on a monthly basis from 4.3 percent in October led by semiconductor and display panel sectors. Auto production grew 1.3 percent over the same period, rising for the third consecutive month. Domestic demand also showed stable performance. Sales of consumer goods expanded 2.3 percent on-month in November thanks to the boost apparel sales due to cold weather. Production in the service industry increased 0.8 percent in November from a month before. Exports, which account for more than half of the Asia's No. 4 economy, plunged 5.3 percent on-year in December, but the sharp fall was attributable to fewer working days stemming from the presidential election and Christmas occurring on a weekday. "Workday-adjusted export growth actually gained a solid 7.6 percent on-year in December. Our monthly Korea GDP tracker suggests that GDP growth is bottoming out, supported by exports," said Kwon Young-sun, an economist at Nomura International in Hong Kong.