BOK freezes key interest rate for 8th month

The central bank on Thursday kept the key interest rate steady for the eighth straight month in February as an unstable inflation outlook and an economic slowdown continue to challenge Asia's fourth-largest economy.

Bank of Korea (BOK) Gov. Kim Choong-soo and his six fellow policymakers held the benchmark 7-day repo rate at 3.25 percent in February, as widely expected.

All 14 analysts surveyed by Yonhap Infomax, the financial news arm of Yonhap News Agency, predicted that the central bank would keep the borrowing costs unchanged this month.

"The BOK cut 3.25 percentage points from the total rate to a record low of 2 percent between October 2008 and February 2009. Since July 2010, the BOK has raised borrowing costs by 1.25 percentage points in five steps in a bid to curb inflation.

Growth in the South Korean economy slowed due to subdued domestic demand and contractions in exports, the BOK said in a statement. High inflation expectations and Middle East risks threaten to destabilize consumer prices, it added.

The Korean economy saw sputtering exports and domestic demand in recent months, expanding at a lower-than-expected rate of 0.4 percent in the final quarter of 2011, due to external factors such as Europe's crisis and internal factors, including heavy household debts that squeezed private consumption.

Even as the growth rate in consumer prices cooled in January from the previous two months, inflation remains a source of concern for South Korean policymakers as hikes in public service prices are anticipated and the public still expects consumer price growth to top 4 percent this year, the upper ceiling of the BOK's target range.

Analysts said still-elevated inflationary pressure, coupled with dim growth prospects for the domestic economy, had left little room for the BOK policymakers to change the current interest level.

Given that consumer prices and the slowdown in domestic growth will likely continue creating headaches for Korean policymakers, no clear consensus has emerged among analysts regarding the BOK's moves in the coming months.

Even though the BOK chief said last month that the central bank will move to "normalize" the key rate, meaning it will resume monetary tightening when deemed appropriate, some analysts predict that the BOK may ease monetary policy to stimulate the domestic demand.

Most analysts, however, predict a rate freeze for the rest of the year with a small number expecting a rate hike.

The central bank forecast in a report on Tuesday the domestic economy will pick up at a moderate speed after June. But downside risks to the Korean economy loom larger than upside risks, it warned.(Yonhap)