BOK to maintain tightening policy

By Kim Jae-kyoung, Kim Jae-won

The central bank surprised the market Thursday by freezing the key interest rate at 2.25 percent but its chief said that it will continue to maintain the credit-tightening mode to normalize monetary policy, hinting that an additional rate hike will come in the coming months.

Bank of Korea (BOK) Governor Kim Choong-soo made the remarks after he and his fellow policymakers froze the benchmark rate for the second consecutive month on growing concerns over the slowing global economy and sluggish real estate market.

“The Korean economy is expected to continue its solid growth thanks to robust exports and recovery in consumption and facility investment," Kim said in a press conference held at the main office of the BOK in downtown Seoul.

However, the possible economic slowdown in other major economies and the euro-zone debt crisis will act as downside risks to growth.”

He also said that the real estate market is one of the most important parts of the domestic economy, suggesting that it was one of the factors that prevented the central bank from hiking the rate.

“The housing market is a very important factor to decide the key interest rate. People expect housing prices will further plunge, so they do not enter the market. This is worrisome for the economy,” he said.

“Market analysts said that the central bank missed a good chance to come closer to policy normalization, forecasting that it will not rush to hike the key rate for the rest of the year.

“We believe that the central bank missed a good chance to get ahead of the curve and provide itself with further room to maneuver policy in the future should the downside risks to growth materialize,” Nomura economist Kwon Young-sun said.

“We do see a greater risk if the BOK stands pat through the year’s end. The BOK could risk losing a grip on its anchored inflation expectations as it seems to be too influenced by current data flow rather than underlying growth, limited spare economic capacity and the inflation outlook,” he added.

“We now expect the BOK to deliver only one 25 basis points hike in the fourth quarter to 2.50%.”

In July, the BOK raised its rate for the first time since the onset of the global financial turmoil by lifting the rate to 2.25 percent from a record low of 2 percent, a move to preemptively curb inflationary pressure.

But South Korea’s export-driven economy cannot be free from the economic slowdown in the U.S. and China, making policymakers take a cautious note against the global growth outlook.

The finance ministry said on Tuesday that the South Korean economy is facing “greater” downside risks, citing economic uncertainties abroad and possible fluctuations in raw material prices, despite its better-than-expected recovery.

But the need to normalize the low rate is increasing as the economic recovery and spikes in agricultural product prices are widely expected to put upward pressure on inflation. The central bank said consumer prices are likely to top 3 percent from the fourth quarter, the median point of the bank’s inflation target for 2010-2012.

The International Monetary Fund (IMF) said last week a key rate of near 4 percent would be a neutral level for South Korea, which could boost employment and activity without sparking inflation, calling for well-calibrated normalization of the accommodative policy stance.

Gov. Kim has said that despite the recent rate hike, the current monetary policy stance is still viewed as “highly accommodative,” hinting that an additional rate increase is in the offing.