BOK freezes key interest rate for 7th month
Published : Jan 13, 2012 - 11:03
Updated : Jan 13, 2012 - 11:09

South Korea's central bank on Friday left the key interest rate unchanged for the seventh straight month due to still-high consumer inflation even as the eurozone debt crisis is feared to dent economic growth.

Bank of Korea (BOK) Gov. Kim Choong-soo and his fellow policymakers held the benchmark 7-day repo rate at 3.25 percent for January.

The rate freeze is in line with market forecasts. All 19 analysts expected that the BOK would keep the borrowing costs unchanged, according to a poll by Yonhap Infomax, the financial news arm of Yonhap News Agency.

Analysts said that the accelerating growth of consumer prices weakened expectations that the central bank may resume monetary easing to cushion the domestic economy from Europe's debt crisis.

"Although inflationary pressure continues to build up, a slowdown in the economy is also picking up. It seems difficult either to cut or to raise the key rate," said Lim Noh-jung, an economist at Solomon Investment & Securities Co., before the BOK announced the result of its first rate-setting meeting of the year.

Even though Europe's sovereign debt crisis clouds the growth prospects for the export-driven countries like South Korea, central banks in Asia have refrained from lowering borrowing costs out of concern that such a move may stoke inflationary pressure.

On Thursday, Bank Indonesia kept interest rates unchanged for a second month in January on inflation fears.

In December, South Korea's consumer prices grew over 4 percent year-on-year for a second straight month, government data showed, due to rises in agricultural prices and high energy costs.

Core inflation, excluding volatile oil and food costs, climbed

3.6 percent from a year ago in the same month, the highest monthly hike in 2011.

The BOK said last month that its 2012 monetary policy will focus on stabilizing consumer prices as the annual consumer inflation hit the upper end of the central bank's target range.

A buildup in consumer prices is likely to ease at a moderate pace in 2012, even as the domestic growth slows from the previous year, the BOK added on Dec. 29. 

Downside risks to the South Korean economy could be "substantial" with Europe's sovereign debt crisis and faltering growth in South Korea's major trading partners, the central bank said.

With adverse conditions in the global economy, the South Korean economy is forecast to expand at a slower pace of 3.7 percent this year, compared with 3.8 percent growth in 2011.

Some analysts expect the BOK to lower borrowing costs later in 2012 when consumer inflation begins to ease.

"(South Korea's) consumer prices may stabilize overall in the second quarter, giving room for rate cuts (in the same quarter),"

said Yoon Yeo-sam, a fixed-income analyst at Daewoo Securities Co. Yoon added that the U.S.-led global recovery may not be sustainable, likely calling for the central bank to step in with monetary easing. 

The central bank forecast the country's consumer price growth to ease to 3.1 percent in the second half of 2012, from 3.5 percent in the first half.

Others expect the BOK to extend a pause in monetary easing for 2012 to brace for possible deteriorations in eurozone countries.

"Unless the eurozone fiscal crisis worsens or a rapid cooldown in exports takes place, the BOK is expected to maintain its standpat stance," said Lee Sang-jae, an economist at Hyundai Securities Co.

The BOK cut 3.25 percentage points from the total rate to a record low of 2 percent between October 2008 and February 2009.

Since July 2010, the BOK has raised borrowing costs by 1.25 percentage points in five steps in a bid to curb inflation. (Yonhap News)