South Korea's central bank held its base rate steady at 2.5 percent, as widely expected, saying the country's moderate economic growth is continuing with exports and consumption improving while inflation should remain low despite the recent rise in oil prices.
The Bank of Korea (BOK), which cut its rate in May, repeated that it expects the economy's negative output gap to remain for a considerable time though it will gradually narrow.
Despite the weak global economy, Korea is starting to pick up with second quarter Gross Domestic Product recording its strongest quarterly growth rate in nine quarters. GDP rose 1.1 percent from the first quarter for annual growth of 2.3 percent, boosted by government spending.
Economists expect the BOK to maintain its rate through the first half of next year before its starts raising rates. In July the BOK raised its 2013 growth forecast to 2.8 percent.
The central bank noted that the scale of increases in the number of persons employed has expanded in line with increases in the 50-and-above age group and the service sector.
But while the BOK expects the global economy to sustain its "modest recovery," the bank said there were still downside risks, pointing to the uncertainties surrounding the scale of tapering of Quantitative Easing by the U.S. Federal Reserve, fiscal consolidation in major countries, financial instability in some emerging countries and geopolitical risks in the Middle East.
South Korea's headline inflation eased to 1.3 percent in August from 1.4 percent in July, and the BOK has forecast average inflation this year of 1.7 percent. It targets inflation of 2.5-3.5 percent.
Following the launch of the Bank of Japan's new phase of monetary easing in April, the won rose over 10 percent against the Japanese yen by mid-May, raising alarm bells in Korea over the competitiveness of its exporters.
But it fell back from late May through mid-June, in line with most emerging market currencies, before it started rising again as investors returned, trading at 10.88 won to the Japanese yen today, up from 12.26 at the start of the year, a gain of 11 percent.
"In the domestic financial markets, despite the heightened volatility in the international financial markets and the instabilities in the financial and foreign exchange markets of some emerging economies, stock prices have risen and the Korean won has appreciated, due mainly to the net inflows of foreigners' stock investment funds," the BOK said.