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| BOK Governor Rhee Chang-yong speaks during a press conference following a monetary policy board meeting at the BOK's newly renovated headquarters in central Seoul, Thursday. Yonhap |
Key rate kept untouched at 3.5% for 3rd consecutive time
By Yi Whan-woo
The Bank of Korea (BOK) lowered this year's growth forecast for the country to 1.4 percent from 1.6 percent, Thursday, as a prolonged slowdown in exports has increasingly weakened growth momentum.
Amid growing economic woes, the central bank kept the key interest rate steady at 3.5 percent for the third consecutive time following February and April.
The revised growth forecast is lower than 1.5 percent widely projected by multiple financial institutions here and abroad, including the International Monetary Fund (IMF), the Asian Development Bank (ADB) and Moody's.
The BOK's updated outlook comes amid concerns that an economic slowdown has become a bigger concern than inflation.
Correspondingly, the BOK's inflation outlook remained unchanged at 3.5 percent for this year.
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"Domestic economic growth has continued to slow, with the ongoing sluggishness of exports and investment, although private consumption has shown a modest recovery led by services," the BOK's monetary policy board said concerning its rate decision. "Going forward, domestic economic growth is expected to remain weak for some time."
But the board said inflation continues "to moderate as expected," noting that the pace of consumer price growth softened to a 14-month low of 3.7 percent last month.
Speaking to reporters after the rate-setting meeting, BOK Governor Rhee Chang-yong attributed the downward growth revision to the slower-than-expected recovery of China as well as a delayed rebound in Korea's semiconductor and IT industries.
He warned that Korea "already has entered the stage of low growth in the long term," citing the need for reforms in labor, pension, education and other sectors to tackle the low birthrate and an aging population.
Rhee cited the need to enhance support for people who are financially vulnerable to current economic circumstances, although he allayed worries that the country will face a financial crisis.
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| Bank of Korea (BOK) Governor Rhee Chang-yong bangs the gavel during the BOK's first monetary policy board meeting back in its newly renovated headquarters in central Seoul, Thursday. Yonhap |
The latest rate freeze came as the U.S.-Korea interest gap widened to a record 1.75 percentage points, which adds to concerns over the possible outflow of foreign capital in search of safe-haven assets.
Such a possibility is also linked to volatility in the currency market.
Against this backdrop, Rhee acknowledged the interest gap as "a risk factor" but added that the BOK will not obsess over it.
The rate freeze was widely expected by the financial market, which forecast the BOK's credit tightening cycle to end and that it may even cut the rate this year.
The central bank aggressively hiked the rate by a total of 3 percentage points over a year and a half period until January.
"As they check the impact of high interest rates, a slowdown in demand will be witnessed. It means there can be more expectations of rate cuts both in the U.S. and Korea toward the end of the year," said Ahn Ye-ha, an analyst at Kiwoom Securities.
The BOK governor, however, downplayed the possibility of a rate cut, saying it will be "too much to expect."
He added that all seven members of the monetary policy board are "open to lifting the rates to up to 3.75 percent."
"It thus would be wrong to assume the benchmark interest rate will never go up again," he added.
The BOK pointed out that inflation, although on a downward trajectory, is above its target level, and that the board "sees that it is appropriate to maintain the current restrictive policy stance."
"Regarding the need to raise the base rate further, the board will make a judgement while assessing the changes in domestic and external policy conditions," it said.
Meanwhile, Thursday's rate-setting meeting took place for the first time at the BOK's renovated headquarters in central Seoul.
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