Major foreign investment banks are betting that South Korea’s central bank may freeze its key interest rate for the rest of the year, citing an increase in external economic uncertainties, data showed Thursday.
The Bank of Korea froze the benchmark rate at 3.25 percent last week for the second straight month as external economic uncertainties like a U.S. credit downgrade and the eurozone debt crisis outweighed concerns about rising inflation.
After the rate freeze, analysts were divided over whether the BOK could raise the borrowing costs within the year amid rising inflation risks and heightened downside risks to growth.
Foreign investment banks forecast that the central bank is likely to stand pat on the rate by the end of the year if the global economic outlooks do not turn better, according to the Korea Center for International Finance.
Bank of America Merrill Lynch said it cannot be ruled out that the BOK may temporarily suspend its tightening moves if economic uncertainties remain very high.
British banking group Standard Chartered said even as the global financial markets regain their composure, it is difficult for Korean policymakers to shake off concerns about the economic slowdown, which would warrant the rate freeze for the rest of the year.
The BOK kicked off its policy tightening cycle in July of last year, lifting the rate by a combined 1.25 percentage points in five steps to tame inflation.
Experts expect that the central bank may raise the key rate once more, at best, this year and some of them even argue that there is a chance for a rate cut by the BOK if the global economic outlook and financial markets worsen.
BNP Paribas said if the global economy sharply slows, thereby negatively affecting the Korean economy, a rate cut could come.
The first-ever downgrade of U.S. debt early this month has sent the global financial markets into a tailspin, sparking concerns about the health of the global economy.
Analysts said slowing signs of the global economy are feared to hurt Korea’s exports, which account for about half of its economic output, and it may be difficult for South Korea to meet its growth target of around 4 percent this year.
Others also argue that the slowing global economy would put a lid on runaway oil prices, which would help ease inflationary pressure in South Korea, the world’s fifth-largest crude buyer. But inflationary pressure is still strong due to already high oil and food costs, and the sustained economic growth.
The BOK’s inflation projection for 2011 is 4 percent, and BOK Gov. Kim Choong-soo said last week that the central bank does not have an intention to revise its inflation forecast for now. The next rate review is slated for Sept. 8.
