South Korea holds interest rates steady for fourth month

South Korea's central bank held interest rates steady for a fourth straight month yesterday, as expected, but it warned that Japan's expansionary monetary policy could harm future growth as a weak yen could undercut Korean exporters' competitiveness.

Though the decision to leave the base rate unchanged at 2.75 per cent was not unanimous, the central bank said it expected the domestic economy to continue improving.

Asked whether the central bank's easing cycle had ended, Kim Choong-soo, governor of the Bank of Korea, said: "Our current monetary policy is already accommodative."

Nine of 18 analysts surveyed by Reuters after the bank's announcement saw rates remaining unchanged throughout this year.

February's rate meeting was the last during the administration of President Lee Myung-bak before his successor, Park Geun-hye, takes office on February 25.

Despite the myriad problems she faces in office, Park has yet to announce detailed policies to support flagging job growth and ease the household debt burden in South Korea, two festering problems she has promised to beat.

The Bank of Korea cautioned that uncertainties stemming from economic worries in the euro zone and financial consolidation in the United States continued to pose risks.

"In terms of the future growth path however, there are some potential uncertainties, related for instance to fiscal tightening in advanced countries and to the new Japanese government's expansionary policy operations," the bank said.

The comments were made before the Bank of Japan's decision to maintain its current monetary policy. The won is up 5.6 per cent against the yen so far this year, after a 22.8 per cent climb last year.

South Korea, along with other trade-dependent and emerging market economies, is expected to raise its concerns about the effects of quantitative easing by major economies at the Group of 20 meeting in Moscow later this week.

Some emerging market economies offering higher yields have attracted inflows of funds borrowed cheaply elsewhere, which has put upward pressure on their currencies.

Analysts say that the Bank of Korea is unlikely to cut interest rates simply because of the yen's depreciation, reckoning that regulators are more likely to tighten rules on foreign currency trading to relieve potential upward pressure on the won.

HSBC economist Ronald Man said: "A further rate cut will only bring rates down to 2.5 per cent, which is still significantly higher than the very low interest rates seen in the United States, the euro area and Japan," adding that he believes the central bank's easing cycle has ended.