S.Korea keeps interest rates unchanged at 3.0%

South Korea's central bank kept its key interest rate unchanged at 3.0 percent, defying expectations that it would take advantage of low inflation to announce an economy-boosting cut.

The Bank of Korea on Thursday froze its key rate for the second month in a row, having trimmed the rate in July by 25 basis points, in its first policy easing since early 2009.

The July cut coincided with government efforts to reverse a slowdown in the South Korean economy which has struggled with an export slump caused by a weak US economy and the prolonged eurozone debt crisis.

Market analysts had been expecting a further 25 basis point reduction Thursday on the back of government data showing inflation at a 12-year low of 1.2 percent in August and unemployment holding steady at 3.1 percent.

"I think it's a very disappointing decision," said Frances Cheung, a senior strategist at Credit Agricole CIB in Hong Kong.

"Given the weak domestic demand and low inflation, I can see no hurdle to stop them cutting interest rates," Cheung told AFP.

South Korean exports fell for the second consecutive month in August, down 6.2 percent from a year earlier to $42.97 billion. July exports were down 8.8 percent year-on-year.

In June, South Korea revised its economic growth forecast for 2012 down to 3.3 percent from its earlier projection of 3.7 percent, mainly as a result of weak exports.

Earlier this week, the government announced a new $5.2 billion stimulus package of spending and tax relief plans, which Finance Minister Bahk Jae-Wan called a response to "growing concerns about our sagging economic power".

In its statement Thursday, the central bank said it believed the stimulus package would likely "contribute to preventing any deepening of the economic slowdown".

But Credit Agricole's Cheung argued that the package alone was not sufficient and the economy needed both interest rate cuts and fiscal relief to pick up any genuine pace.

"It needs a combination of both monetary and fiscal policy to really have an impact," she said.

The bank said consumer inflation was expected to remain below the median target of 3.0 percent for the time being, despite price pressures caused by a recent typhoon and unstable oil and grain prices.

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