BOK freezes policy rate amid pandemic, Ukraine crisis

South Korea's central bank held its key interest rate steady Thursday amid worries that the upsurge in COVID-19 infections and heightening geopolitical risks stemming from Eastern Europe could undercut economic recovery momentum.

The Bank of Korea (BOK), however, sharply revised upward its inflation outlook for this year, raising the possibility that it could hike the interest rate in the months to come.

As widely expected, the seven-member monetary policy board of the central bank voted to freeze the benchmark seven-day repo rate at 1.25 percent.

The decision, which was made unanimously, came after it delivered a quarter percentage-point hike in January at its first rate-setting meeting of the year. January's rate increase marked the third of its kind since August last year, bringing borrowing costs back to pre-pandemic levels.

Separately, the BOK raised its 2022 inflation outlook to 3.1 percent from 2 percent predicted in November amid surging energy costs. It was the first time that the inflation outlook has been raised above 3 percent since April 2012. Its growth projection for 2022 remains unchanged at 3 percent.

The BOK said the Korean economy continues to recover despite the resurgence of COVID-19, driven by robust exports, but voiced concerns that the global economic growth and financial markets could be affected by the pandemic, inflation woes, monetary policy changes in major countries and geopolitical risks emanating from Eastern Europe.

"The Board will appropriately adjust the degree of monetary policy accommodation as the Korean economy is expected to continue its sound growth and inflation to run above the target level for a considerable time, despite underlying uncertainties over the virus," the BOK said in a statement.

"The Board will judge when to further adjust the degree of accommodation while thoroughly assessing developments related to COVID-19, the risk of a buildup of financial imbalances, the effects of the Base Rate raises, monetary policy changes in major countries, and the trends of growth and inflation."

Following the rate decision, BOK Gov. Lee Ju-yeol told an online press briefing that the consensus of board members is that the central bank needs to continue to normalize its long-term loose monetary policy, saying that a further rate high does not represent the tightening of policy.

The recent rate increases had been mostly aimed at keeping a lid on growing inflationary pressure and reining in household debt after the rate had been maintained at ultralow levels for about two years to prop up the pandemic-hit economy.

The BOK decided to leave the rate steady this time as it wants to have time to gauge the impact of those three rate hikes amounting to a combined 0.75 percentage point.

Thursday's decision is also attributable to anxiety over the recently spiking coronavirus infections and heightening tensions in Ukraine that could weigh on the country's economy.

South Korea's health authorities reported Thursday that daily COVID-19 cases surpassed 170,000 for the second straight day, almost doubling from a week earlier. Infections have been surging in recent weeks due to the fast spread of the more transmissible omicron variant.

Tensions surrounding Ukraine have also been mounting as Russia ordered the deployment of troops into breakaway regions of eastern Ukraine. The U.S. defined the move as an invasion of the country and announced sanctions on Russia. Fears are growing that a military clash in the region could raise energy and raw material prices for South Korea.

Another reason for the BOK to leave the key rate unchanged this month might be intended to wait until it becomes clear how fast and drastically the U.S. would increase its policy rate to counter inflation. The Federal Reserve is widely expected to begin to raise the policy rate in March.

South Korea's economy, Asia's fourth-largest, has been on a recovery track thanks to robust exports and rebound in spending after a slump caused by the pandemic.

The country's gross domestic product is estimated to have grown 4 percent in 2021, a marked turnaround from a year earlier when the economy shrank 0.9 percent, the worst performance since 1998, earlier central bank data showed.

Inflation still remains as a potential drag on the economy. The fast economic recovery and a rebound in spending along with high energy prices and global supply snarls have added to inflationary pressure.

The country's consumer prices rose 3.6 percent on-year in January, staying over the 3 percent mark for fourth straight months. January's figure was higher than the central bank's midterm target of 2 percent for the 10th straight month.

Lee said that the Ukraine crisis has sent crude prices higher and the geopolitical risk was reflected in the central bank's latest inflation outlook. He also voiced concerns that further escalation in tensions or a full-scale war in the region could have significant impact on inflation and the overall Korean economy.

Meanwhile, Thursday's rate-setting meeting was the last one presided over by Lee before he leaves office at the end of March. The BOK's next rate-setting meeting is to be held on April 14. (Yonhap)