BOK holds key rate at 3 percent

Contrary to the market’s initial projection of a rate hike to tame inflation, the Bank of Korea kept the benchmark interest rate unchanged for a second month at 3 percent Friday.

The BOK’s decision followed a decline in consumer and producer prices in April, helped by fresh spring food crops and recent gains in the Korean won.

Still, it came as unexpected to economists and government officials who saw prices rising above the central bank’s target rate of 2 to 4 percent for four consecutive months.

“For Korea, the Monetary Policy Committee judges the economy to have maintained its underlying upward trend, given for instance that exports show continued buoyancy and that domestic demand is increasing,” the central bank said in a statement. The committee is BOK’s decision-making body on major policies.

Consumer Price Index inched down to 4.2 percent in April after hitting a 29-month high of 4.7 percent in March. The central bank aims annual inflation rate to be 3.9 percent this year under a 4.5 percent growth target. 

The won had risen by 4.6 percent against the U.S. dollar in the past four months, easing inflationary pressure.

Foreign investment banks including Goldman Sachs, Nomura and Deutsche Bank as well as 12 economists surveyed by Bloomberg had expected a raise in May.

BOK Governor Kim Choong-soo has said that making gradual and slow steps would be ideal for the economy vulnerable to currency, oil fluctuations and slowing market conditions of the advanced economies.

The rate freeze was in contrast with the Finance Ministry’s apparently expectation of a rate increase.

“The Finance Ministry, like the market consensus, had expected a raise so the rate freeze was a surprise. But the BOK is taking baby steps in tightening of its monetary policies and it isn’t against inflation fight efforts of the government,” an official said.

The Lee Myung-bak administration in January declared “a war against inflation” as public discontent with rising consumer prices led by food and fuel costs was growing.

The BOK has seemingly remained cautious in tightening the monetary policy for the past year, lifting the call rate by a total of 1 percentage point across four steps since July.

But some market analysts said chances are high that the BOK will raise the base rate in June given that the nation is expected to face high inflationary pressure with the price hike hovering above 4 percent for the fourth consecutive month.

By Cynthia J. Kim (cynthiak@heraldcorp.com)