BOK Expected to Freeze Key Rate for 10th Straight Month
By Kim Jae-won
Staff Reporter
The central bank is expected to leave its key interest rate unchanged at the record low level of 2 percent this month for the 10th straight month, as concerns still linger, including worries over domestic consumption and global circumstances, according to analysts.
However, they think Bank of Korea (BOK) Governor Lee Seong-tae, who remained dovish in November, to revert to a more hawkish tone this month, given the rising inflationary pressure caused by high oil and raw material prices.
The BOK has frozen its policy rate since March, putting the brakes on its monetary easing cycle that trimmed the rate by 3.25 percent since last October. A six-member Monetary Policy Committee meeting, chaired by Governor Lee, is scheduled for Thursday.
Most analysts forecast that a rate hike will probably come in the second quarter at the earliest, as the economic recovery has shown signs of losing momentum due to the weakening effectiveness of the government's expansionary policies.
First of all, Korea's dependency on the global economy is delaying the key rate hike ― though the country is on the recovery track, uncertainties linger in the global economy.
``I think the BOK will keep the rate. The Korean economy is picking up, but there are still many unstable elements in the global economy, such as Dubai's debt problem,'' Chang Min, a chief economist at the Korea Institute of Finance, told The Korea Times.
``In addition, it is not certain whether people will expand their consumption.''
Kwon Soon-woo, a chief economist at the Samsung Economic Research Institute, echoed the view, saying, ``The real estate market, especially apartment prices, has calmed down of late. Consumer prices are also stable with a 2.4-percent rise last month. The economic recovery is also slowing down in the fourth quarter. There is no reason to raise the key rate.''
Apartment prices in Seoul have dropped since October, and have fallen 0.01 percent in the first week of December compared to the previous week, according to Real Estate 114.
Kwon said the BOK may keep this stance through the first quarter of 2010.
``I think the central bank may keep the key rate during the first quarter next year. The BOK may consider raising the rate in the second quarter in 2010 if it needs to.''
However, some analysts are worried about inflation and excessive liquidity.
The Korea Development Institute has pointed out that conditions are ripe for Korea to consider an exit strategy, now predicting Korea's economy will grow 5.5 percent next year.
It marked 3.2 percent economic growth in the third quarter from the previous quarter, faring well among other major economies.
Also, inflation makes a key rate hike more likely. Korea's key rate stands at 2 percent, higher than those of major economies, but the real rate, taking inflation into account, is much lower. Consumer prices here rose 2.4 percent last month, which means the real interest rate is less than zero.
``I agree with the KDI suggestion for an exit strategy. If an exit strategy cannot be implemented on time, an asset price bubble will occur,'' an economist of ING said.