The Korea Herald


BOK freezes key rate for 8th straight month in Jan.

By 박한나

Published : Jan. 9, 2014 - 10:57

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South Korea's central bank froze the key interest rate for the eighth consecutive month on Thursday as the local economy is showing signs of a moderate recovery amid tame inflation.

Bank of Korea (BOK) Gov. Kim Choong-soo and his six fellow policymakers held steady the benchmark seven-day repo rate, dubbed the base rate, at 2.5 percent, as widely anticipated.

"The BOK is likely to keep its current stance at least until the first half, given the trend of the economic recovery at home and abroad," said Yoon Yeo-sam, a fixed-income analyst at KDB Daewoo Securities Co.

Yoon said that some raised the need to cut the key rate, citing the low price movement, but as the central bank and the government downplayed concerns about deflation, a rate cut is not likely.

The Korean economy grew 1.1 percent on-quarter in the third quarter and consumer prices ran below the BOK's 2.5-3.5 percent inflation target band for the 19th straight month in December.

Analysts said that the Federal Reserve's recent decision to taper its bond-buying monetary stimulus also seemed to put the BOK on a wait-and-see mode.

Last month, the Fed announced its decision to start reducing its monthly bond purchases by US$10 billion to $75 billion from January, citing a stronger job market.

Most analysts forecast that the central bank would hold the benchmark rate before raising it later this year, but there are still minority voices for a rate cut in the market, citing the won's appreciation.

Goldman Sachs on Monday had raised the chance of a rate cut, saying Korea's financial conditions are getting rapidly tighter due to currency appreciation, rising interest rates and weak stock markets, potentially hampering the recovery momentum.

The Korean currency sharply rose to the dollar and the yen on Friday for the second straight day in 2014 and declined to the lowest level in nearly two months on Monday on the Goldman Sachs report.

Seven analysts expected the BOK to freeze the key rate until the end of this year while another seven argued for a rate hike in a poll of 16 analysts conducted by Yonhap Infomax, the financial news arm of Yonhap News Agency. Two experts see a chance for a rate cut this year.

"As the Korean economy is seen as recovering to its potential growth around the fourth quarter, the BOK may begin to hike the key rate then," said Kong Dong-rak, a fixed-income analyst at Hanwha Investment & Securities Co.

The BOK lowered the borrowing cost in May 2012 after cutting it in July and October 2011 to support the economic recovery. (Yonhap News)