BOK freezes key rate at 3 %
South Korea's central bank unexpectedly froze the key interest rate on Friday for the second straight month as economic uncertainty such as the eurozone debt crisis persists even in the face of inflation risks.
Bank of Korea (BOK) Gov. Kim Choong-soo and his fellow policymakers held steady the benchmark seven-day repo rate, dubbed the base rate, at 3 percent for May.
The decision came as a surprise as only three out of 17 analysts predicted a rate freeze in a poll by Yonhap Infomax, the financial news arm of Yonhap News Agency.
Experts said that the BOK might have taken a pause this month due to increased economic uncertainty at home and abroad, despite lingering inflation risks.
"Global market volatility heightened on growing jitters over Greece's debt concerns. On the domestic front, the savings bank crisis and household debt problems might prevent BOK policymakers from raising the rate this month," Lee Sung-kwon, a senior economist at Shinhan Investment Corp., said before the decision.
Global financial markets have recently undergone high fluctuation, hit by a record nosedive in commodities and signs of Greece's potential debt restructuring. There is a high chance that the market uncertainty will likely increase ahead of the planned end of the Federal Reserve's bond-buying program scheduled for June, experts say.
South Korea, however, is facing high inflationary pressure with the price growth hovering above 4 percent for the fourth consecutive month. In a bid to tame inflation, the BOK has raised the key rate by a combined 1 percentage point since July last year.
Consumer prices rose 4.2 percent in April from a year earlier, slowing from a 4.7 percent expansion in March. But consumer inflation surpassed the upper ceiling of the BOK's 2-4 percent inflation target band for the fourth straight month.
South Korea is grappling with inflation risks as still-high oil and food prices as well as sustained economic growth are exerting upward pressure on consumer prices.
The BOK revised up its 2011 inflation projection to 3.9 percent from its earlier estimate of 3.5 percent. The government recently forecast that inflation growth is unlikely to fall below the 4 percent mark until the end of the first half.
The government, which declared a "war on inflation" earlier this year, is making all-out efforts to curb inflationary pressure, raising speculation that the government may raise its inflation forecast to the upper range of 3 percent.
The local economy is on the upward trend, aided by record-high exports. In April, exports, which accounted for about 50 percent of the economy, hit an all-time high of $49.77 billion.
Analysts said the central bank is expected to adjust the pace of the tightening cycle by taking into account economic and financial conditions at home and abroad.
The BOK governor said last month that the central bank is focusing on managing the long-term trend of inflation expectations, adding that it plans to seek policy normalization at a measured pace. (Yonhap News)