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BOK looks tilted toward rate freeze

Korea’s central bank may leave the key rate unchanged for the third straight month for June in the face of lingering economic uncertainty, including the eurozone debt woes, a poll showed Tuesday.

Nine out of 15 economists forecast that the Bank of Korea will freeze the benchmark seven-day repo rate at 3 percent on Friday, according to the survey by Yonhap Infomax, the financial news arm of Yonhap News Agency.

Despite inflation risks, BOK policymakers unexpectedly held the rate steady for the second consecutive month in May as economic uncertainties such as unstable oil prices and the eurozone debt crisis persist. The bank has raised the borrowing costs by a combined 1 percentage point in four steps since July last year.

Analysts said the BOK is likely to take a pause this month as the on-year growth pace of consumer prices has eased and a planned end of the Federal Reserve’s bond-buying program and Greece’s debt crisis serve as economic uncertainties.

“As the BOK chief has hinted that a rate hike is not likely until economic uncertainty subdues, policymakers are expected to freeze the rate this month,” said Shin Dong-su, an economist at NH Investment & Securities Co.

“Concerns about the pace of the U.S. economy, a planned completion of the Fed’s asset-buying scheme and fears about Greece’s possible debt restructuring are adding to economic uncertainty.”

South Korea’s consumer prices grew 4.1 percent in May from a year earlier, slowing from a 4.2 percent on-year expansion seen in April.

External economic uncertainty is showing no signs of abating.

Volatility of global financial markets has increased ahead of the Fed’s planned end of a US$600 billion asset-buying program at the end of June. Fears about Greece’s potential debt restructuring have weighed on the global markets. On the domestic front, problems of ailing savings banks and snowballing household debt have become headaches for policymakers.

BOK Gov. Kim Choong-soo said in a seminar in May that the central bank will try to raise the key interest rate carefully because a steep rate increase could dent the economy, upping speculation that a rate hike is not likely to come this month.

But arguments for raising the rate in June are also convincing as the slowed growth pace of inflation does not mean that inflation risks are dispelled. In the poll, six out of 15 analysts argued for a rate hike this month.

The country’s inflation exceeded the upper ceiling of the BOK’s 2-4 percent inflation target for the fifth straight month in May.

Core inflation, which excludes volatile oil and food prices, rose 3.5 percent last month from a year earlier, the highest in 23 months and quickening from 3.2 percent in April.

The Korean economy is on a solid recovery track, aided by strong exports, but domestic demand has been largely lackluster as rising inflation is crimping household’s income growth and purchasing power.

Korea’s new Finance Minister Bahk Jae-wan said last week that his policy priorities are to stabilize prices and generate jobs, as high inflation deepens the suffering of low and mid-income people.

“Core inflation is rising at a faster-than-expected pace. A spike in public utility charges slated for the second half is also expected to have considerable impacts on inflation,” said Yum Sang-hoon, a fixed-income analyst at SK Securities Co.

Experts said if the BOK freezes the key rate this month, the next rate hike may come as early as July when uncertainty surrounding the Fed’s end of the asset-buying program would be eased. 

(Yonhap News)