BOK freezes key rate following July's rate cut
Korea's central bank froze the key interest rate on Thursday in an apparent bid to gauge the impacts of its surprise rate cut in July on the local economy amid the protracted eurozone debt crisis.
Bank of Korea (BOK) Gov. Kim Choong-soo and his fellow policymakers held steady the benchmark 7-day repo rate at 3 percent for August. The move followed the BOK's quarter-percentage point rate reduction in July, the first cut in more than three years.
The decision was widely anticipated as 13 out of 21 analysts polled by Yonhap Infomax, the financial news arm of Yonhap News Agency, forecast the freeze. Eight experts bet on a back-to-back rate cut for August.
Analysts said faltering exports and slowing inflation growth could have given leeway to the BOK to cut the rate this month, but the rate freeze came as the bank seems to need time to gauge the impact of July's rate cut on the export-dependent economy.
"If the BOK had cut the rate for a second straight month, economic agents would have cemented their bleak assessment of the Korean economy, which would have been bad enough to warrant a back-to-back cut," said Kong Dong-rak, a fixed-income analyst at Taurus Investment & Securities Co.
"The rate freeze came as the BOK can now wait and see the impact of monetary easing steps to be taken by the U.S. and Europe before deciding on taking a second rate cut."
The protracted eurozone debt crisis and China's slowing economy are blurring the prospects of the Korean economy, which grew a mere 0.4 percent on-quarter in the second quarter.
South Korea's exports dropped 8.8 percent in July from a year earlier, the sharpest decline since September 2009. Imports fell for the fifth straight month as domestic demand is weakening due to the economic slowdown.
The BOK's 2012 growth outlook was lowered to 3 percent from 3.5 percent. Finance Minister Bahk Jae-wan and the BOK chief earlier hinted that the full-year growth may reach below 3 percent.
Central banks in the eurozone and the U.S. did not take quantitative easing steps this month, but expectations are growing that they will do so next month to help the global economy get back on track.
Amid the slowing economy, upward pressure on consumer prices is easing with the country's headline inflation growing 1.5 percent on-year in July, the slowest pace in 12 years. The BOK aims to keep its median inflation target at 3 percent for 2010-2012.
Analysts said once the BOK shifted its monetary stance into a soft bias last month, a rate cut will be just a matter of timing, not a matter of choice.
"Given the BOK's cautiousness in making the rate policy, a rate cut is likely to come in September," said Oh Suk-tae, an economist at Standard Chartered Bank Korea. "A third rate reduction may come in the fourth quarter as well."
The BOK slashed the key rate by 3.25 percentage points to a record low of 2 percent between October 2008 and February 2009 to fight global financial turmoil. The bank raised it by five steps between July 2010 and June 2011 to curb inflationary pressure.(Yonhap)