By Choi Kyong-ae
The Bank of Korea will likely cut its interest rate as early as August in line with the Ministry of Finance's drive to boost the economy.
BOK Governor Lee Ju-yeol said Thursday that six of the seven-member monetary policy committee agreed to keep the benchmark interest rate steady at 2.5 percent for a 14th straight month.
In a reversal from his previous stance where he said the current key rate was "acceptable," Lee said the central bank and the government needed to narrow a gap in monetary policy.
"The risks of economic downturn have increased," the governor said at a briefing. "The Sewol disaster that occurred in late April changed the overall economic landscape. The tragic incident's ripple effects are lasting longer than expected, putting pressure on consumer sentiment."
Lee added, however, that a rate cut would push up household debt and housing rental prices because it would draw more people to banks for loans.
In April, the BOK forecast that the country's gross domestic product growth would be 4 percent and Consumer Price Index (CPI) inflation to be 2.1 percent this year. But on Thursday, it revised down the forecasts to 3.8 percent and 1.9 percent, respectively.
Analysts said the central bank is expected to cut the key rate soon.
"As the central bank now sees the economy facing bigger downside risks, it seems to be taking steps to cut the base rate sooner to help support sluggish domestic consumption," Kim Sang-hoon, a fixed-income analyst at Hana Daetwoo Securities, said by telephone.
He said Korea needs to preemptively cut the base rate before the U.S. raises its rates. "That's because Korea has to secure room for a rate hike in advance in the event of a hike in the U.S."
Meanwhile, the rate freeze comes amid requests for a rate cut as a way to stimulate domestic consumption.
In a National Assembly hearing held Wednesday, Finance Minister Nominee Choi Kyung-hwan said he will consider all possible measures across fiscal and monetary policies to support growth. He expected the country's economic growth to be lower than the government's earlier forecast of 3.9 percent for the year at 3.8 percent.
"We have seen increasing risks of a debt overhang trapping the Korean economy in a vicious cycle. Lower interest rates result in higher debt. Domestic demand then structurally weakens. The bank can do little except maintain low rates or lower rates to support the leveraged economy," Nomura economist Kwon Young-sun said in a research note.
The CPI held steady in June at 1.7 percent compared with a year earlier, below the bank's inflation target range of 2.5 percent to 3.5 percent. Low inflation allows the bank to have leeway to underpin the economy.
The bank last cut its policy rate in May 2013, from 2.75 percent to 2.5 percent.
The Bank of Korea will likely cut its interest rate as early as August in line with the Ministry of Finance's drive to boost the economy.
BOK Governor Lee Ju-yeol said Thursday that six of the seven-member monetary policy committee agreed to keep the benchmark interest rate steady at 2.5 percent for a 14th straight month.
In a reversal from his previous stance where he said the current key rate was "acceptable," Lee said the central bank and the government needed to narrow a gap in monetary policy.
"The risks of economic downturn have increased," the governor said at a briefing. "The Sewol disaster that occurred in late April changed the overall economic landscape. The tragic incident's ripple effects are lasting longer than expected, putting pressure on consumer sentiment."
Lee added, however, that a rate cut would push up household debt and housing rental prices because it would draw more people to banks for loans.
In April, the BOK forecast that the country's gross domestic product growth would be 4 percent and Consumer Price Index (CPI) inflation to be 2.1 percent this year. But on Thursday, it revised down the forecasts to 3.8 percent and 1.9 percent, respectively.
Analysts said the central bank is expected to cut the key rate soon.
"As the central bank now sees the economy facing bigger downside risks, it seems to be taking steps to cut the base rate sooner to help support sluggish domestic consumption," Kim Sang-hoon, a fixed-income analyst at Hana Daetwoo Securities, said by telephone.
He said Korea needs to preemptively cut the base rate before the U.S. raises its rates. "That's because Korea has to secure room for a rate hike in advance in the event of a hike in the U.S."
Meanwhile, the rate freeze comes amid requests for a rate cut as a way to stimulate domestic consumption.
In a National Assembly hearing held Wednesday, Finance Minister Nominee Choi Kyung-hwan said he will consider all possible measures across fiscal and monetary policies to support growth. He expected the country's economic growth to be lower than the government's earlier forecast of 3.9 percent for the year at 3.8 percent.
"We have seen increasing risks of a debt overhang trapping the Korean economy in a vicious cycle. Lower interest rates result in higher debt. Domestic demand then structurally weakens. The bank can do little except maintain low rates or lower rates to support the leveraged economy," Nomura economist Kwon Young-sun said in a research note.
The CPI held steady in June at 1.7 percent compared with a year earlier, below the bank's inflation target range of 2.5 percent to 3.5 percent. Low inflation allows the bank to have leeway to underpin the economy.
The bank last cut its policy rate in May 2013, from 2.75 percent to 2.5 percent.
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