Korea’s central bank left the key interest rate unchanged at 2.5 percent for the 12th straight month Friday on concerns of dwindling consumer spending in the aftermath of the sinking of the ferry Sewol, which has left almost 300 people dead.
Regarding the move, the Bank of Korea cited uncertainties in domestic demand triggered by the lack of spending among Koreans who are still mourning over the ferry incident. At the same time, the bank said it expected the economy to maintain its upward trend.
The central bank added that the monetary policy committee would pay close attention to external risk factors such as shifts in major countries’ monetary policies, while closely monitoring the activity in domestic demand.
Analysts echoed the bank in their comments on the rate freeze.
“As there is a growing chance that domestic demand may slow in the second quarter, there might be the need to check the growth path for the third quarter,” said Lee Jae-hyoung, an analyst at Tong Yang Securities Co. “Given the Korean currency’s strength and low inflation, the BOK is not likely to hike the key rate preemptively.”
The decision came amid growing concerns that the deadly sinking of the Sewol is feared to sap consumer spending, which analysts fear could slow economic growth.
The 6,825-ton Sewol sank on April 16, with hundreds of high school students on a field trip aboard. More than 270 people have been confirmed dead, with 34 still missing. A number of industries are seeing slumps as people saddened by the accident are shunning spending.
Earlier in the day, the government said it would spend an additional 7.8 trillion won ($7.6 billion) in the first half to support weakening domestic demand in the wake of the ferry sinking.
It said that it will provide low-interest loans to businesses in the tourism, transportation and lodging sectors, which have been badly hit by massive contract cancellations and a sharp drop in demand.
The Korean won’s gain to the U.S. dollar could also complicate policymakers’ efforts to gauge the timing of a possible rate increase, analysts say. The won’s strength makes prices of Korean goods more expensive in overseas markets, compared with their rivals.
The won rose to the highest level in nearly six years against the greenback on Wednesday as the dollar remained weak against major currencies.
The Korean economy is on a moderate recovery path on the back of robust exports and improvement in domestic demand.
The BOK earlier forecast that the Korean economy would grow 4 percent this year following a 3 percent advance last year.
By Bae Hyun-jung and news reports (tellme@heraldcorp.com)
