The Korea Herald


BOK likely to freeze interest rate for July: poll

By 신용배

Published : July 12, 2011 - 19:33

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Korea’s central bank is widely expected to freeze the key interest rate for July following a rate hike in June due to growing household debt and lingering external economic uncertainty, a poll showed Tuesday.

Eighteen out of 19 economists predicted that the Bank of Korea will freeze the benchmark seven-day repo rate at 3.25 percent on Thursday, according to the survey by Yonhap Infomax, the financial news arm of Yonhap News Agency.

The central bank last month surprised the market by delivering a rate hike earlier than expected, saying that it saw growing inflationary pressure due to the economic recovery. The bank has raised the borrowing costs in five steps since July last year.

Analysts said the BOK is expected to leave the rate unchanged this month in a bid to gauge the impact of a rate increase on the economy and to prevent households from shouldering too much of the burden for debt repayment.

“A back-to-back rate hike would increase households’ debt burdens and have a negative impact on the economic recovery. The BOK is likely to freeze the rate this week to assess the fallout from June’s rate hike on the economy,” said Kim Yoon-gee, a senior economist at the Daishin Economic Research Institute.

Korea is grappling with snowballing household debt, which surpassed the 800 trillion won mark on the back of a long streak of low rates and the economic recovery. Last month, the government unveiled a set of measures to curb growing household debt by tightening banks’ loan-to-deposit ratios and mending banks’ lending practices.

External economic uncertainties also persist, which makes BOK policymakers cautious about the timing of a rate increase.

The European Union is discussing details about a bailout for debt-ridden Greece and on July 5 Moody’s Investors Service downgraded Portugal’s credit rating to junk, pointing to lingering concerns about the eurozone debt crisis.

But the rate freeze does not mean that concerns about inflationary pressure have eased as consumer prices grew by more than 4 percent for the sixth straight month in June, experts say.

Korea’s consumer prices rose 4.4 percent in June from a year earlier, up from a 4.1 percent on-year expansion in May. The inflation rate topped the upper ceiling of the BOK’s 2-4 percent inflation target zone for the sixth consecutive month.

Core inflation, which excludes volatile oil and food costs, adds to concerns as demand-pull inflationary pressure is mounting.

Core inflation grew 3.7 percent on-year in June, the fastest expansion in over two years, accelerating from 3.5 percent in May. 

(Yonhap News)