Central bank wants room to maneuver in case economic conditions worsen, analysts say


The South Korean central bank unexpectedly froze the key interest rate for two consecutive months, dashing market expectations that it would cut the rate to boost sagging domestic demand and exports.

The Bank of Korea announced on Thursday that it will keep the rate at 3 percent for September. The decision came as a surprise as many expected that the bank would cut the rate as an additional measure to bolster the slowing local economy. It had been expected that gross domestic product growth would slow down to the 2-percent range due to sluggish export and domestic demand, although the economy grew 0.3 percent in April-June from the previous quarter.

Analysts said the decision to keep interest rates is an apparent move to buy time to observe the development of the the effect of the eurozone bond-buying program’s effect on the financial crisis in Europe. They said the central bank seems to want to save “ammunition” in a move to prepare for a possible worsening of the nation’s economic condition.

BOK Governor Kim Choong-soo indicated that the bank may cut the interest rate next month when he said its rate policy direction will be decided on the development of external economic risks.

“The BOK policymakers will make their rate decision flexibly based on the latest data available every month,” Kim was quoted as saying at a press conference.

Analysts see that the BOK is still monitoring the impact of the eurozone debt crisis on the local economy. Expectations are growing, however, that the bank may cut the rate to 2.75 percent next month in hopes to revitalize growth as well as in consideration of major upcoming political events, including the presidential election in December.

The BOK slashed the key rate to a record low of 2 percent between October 2008 and February 2009 to fight the impact of global financial turmoil. This year it cut the rate in July from 3.25 percent to 3 percent.

“The BOK might have needed one more month to assess whether its July rate cut has been effective in boosting growth. But a rate cut is a matter of timing, not a matter of choice, so I think that the BOK is likely to trim the key rate in October,” Yum Sang-hoon, an analyst at SK Securities Co, was quoted as saying by Yonhap News.

The nation’s exports and imports showed poor performances in July and August, reflecting the shrinking demand both within and outside of the country due to the global economic slowdown. The country’s overseas shipments fell 6.2 percent on-year in August, and consumer prices grew 1.2 percent, marking the slowest growth in more than 12 years, according to Statistics Korea.

Earlier this week, the government announced a new $5.2 billion stimulus package of spending and tax cut plans in an effort to boost lackluster domestic consumption affected by the prolonged eurozone financial crisis.

By Park Min-young (claire@heraldcorp.com)