The Korea Herald


BOK freezes key rate at 3 pct for April

By 신용배

Published : April 12, 2011 - 11:30

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BOK freezes key rate at 3 pct for April

South Korea's central bank froze the key interest rate on Tuesday, a sign that it needs more time to assess the impact of a rate hike in March amid lingering economic uncertainties like the fallout from Japan's quake.

   Bank of Korea (BOK) Gov. Kim Choong-soo and his fellow policymakers froze the benchmark seven-day repo rate, dubbed the base rate, at 3 percent for April, following a quarter-percentage point rate increase in March.

   The decision is in line with a forecast of 18 economists surveyed by Yonhap Infomax, the financial news arm of Yonhap News Agency.

   In a bid to curb inflationary pressure, the BOK has hiked the borrowing cost by a combined 1 percentage point since July last year.

   Analysts said BOK policymakers left the rate unchanged as they need time to assess the impact of March's rate increase, and the local currency's gain is expected to help ease upward pressure on inflation.

   "A back-to-back rate hike is unlikely in April as the BOK's chief has hinted that policy normalization will be done at a measured pace," Shin Dong-su, an economist at NH Investment & Securities Co., said before the decision. "Economic uncertainties also linger in the wake of Japan's devastating earthquake."

   The global economy is recovering at an uneven pace. Advanced economies are undergoing fragile recoveries while emerging countries are growing solidly amid risks of higher inflation and asset bubbles.

   Despite the global recovery, there are still economic uncertainties, like Japan's quake and the eurozone debt crisis, making policymakers around the globe adjust the pace of policy normalization.

   Although the BOK took a pause this month, South Korea is facing growing inflationary pressure, sparked by rising oil and commodity prices and gains in food costs, as well as sustained economic growth.

   The country's consumer prices jumped 4.7 percent in March from a year earlier, surpassing the upper ceiling of the BOK's 2-4 percent inflation target band for three months in a row.

   The central bank forecast consumer prices to grow 3.5 percent this year, up from 2.9 percent in 2010. The International Monetary Fund on Monday revised up its inflation projection for Korea to 4.5 percent in 2011 from an earlier estimate of 3.4 percent.

   In an about-face, the government, which previously put growth before price stability, is making all-out efforts to curb inflation by unveiling a set of anti-inflationary steps and clamping down on price rigging.

   Experts said the won's recent gain to the dollar is expected to help ease inflationary pressure by cutting the growth of import prices. South Korea, the world's fifth-largest purchaser of crude oil, relies entirely on imports for its oil needs.

   Finance Minister Yoon Jeung-hyun said in late March that the government is not seeking to make the local currency weaken intentionally, raising speculation that the government would allow the won to appreciate to the greenback to some degree in a bid to help stem inflation.

   Analysts said the BOK is expected to resume its tightening cycle in May or June in an attempt to put a lid on rising inflation.

   "Given that the sheer level of consumer prices is high, there would be no doubt about the belief that the BOK will continue to raise the rate," said Gong Dong-rak, a fixed-income analyst at Taurus Investment & Securities. "In May, another rate increase is anticipated."

   They also said BOK board members will closely watch policy normalization moves by central banks in major advanced economies and market impacts by a potential end to the U.S. Federal Reserve's US$600 billion bond-buying program.

   The European Central Bank raised its key interest rate on Thursday by a quarter percentage point to 1.25 percent, its first rate hike since the onset of the 2008 global financial turmoil.

Opinions are divided among Fed policymakers over inflation projections and the appropriate timing of an exit from emergency steps and record-low rates. (Yonhap News)