BOK freezes key interest rate for 12th month

Central bank sees U.S. slowdown, eurozone crisis casting shadow over Korean economy


The Bank of Korea kept its key interest rate unchanged the 12th month in a row, maintaining its cautious monetary policy due to external macroeconomic factors of the eurozone crisis and the U.S. slowdown.

The central bank’s monetary policy committee froze the seven-day repurchase rate at 3.25 percent on Friday, unwilling to apply the brakes as it did in the first half of last year, despite stable exports and growth.

The Bank of Korea raised its interest rate by 0.25 percentage point in January, March and June last year, but has stopped its tight monetary policy since July last year amid growing concerns over the economic health of Europe, which is one of Korea’s biggest trading partners alongside China and the U.S.

Even though Korea is expected to maintain its sound growth in the long-run with an increasing employment rate and slight rebound in consumption and corporate facility investment, the prolonged U.S. slowdown and the eurozone crisis are casting a shadow over the Korean economy, the central bank said in a press release.

Also, Korea’s low inflation rate at around the 2 percent level was justifiable for the central bank to keep its interest rate the same. However, it cautioned that there would be some inflationary pressure ahead especially due to an expected rise in public utility bills, which analysts said could be a factor that might lead the BOK to consider raising the interest rate.

However, the general consensus is that the central bank is likely to keep its current monetary policy maintaining the 3.25 percent rate until the rest of this year, analysts said.

The U.S. economy only grew 1.2 percent in the first quarter of this year, while the eurozone’s GDP growth decreased by 0.1 percent. Korea had 2.8 percent growth, according to BOK data.

China, meanwhile, posted 8.1 percent GDP growth where the People’s Bank of China, its central bank, cut its key interest rates ― lending and deposit rates ― to spur growth as a means to buffer itself from the developed market turmoil.

Emerging markets, also being affected by slow growth in advanced economies, are facing a continuation of weak growth, achieving 6.1 percent in the first quarter of 2012; 5.2 percent in the fourth quarter of 2011; and 5.3 percent in the third quarter of last year.

The Korea Development Institute, a state-run think tank, has revised Korea’s 2012 growth forecast to 3.6 percent from its earlier estimation of 3.8 percent due to the global economic slowdown. However, it noted that the country’s growth would be able to climb back to the 4 percent level next year with the global economy headed for a recovery.

By Park Hyong-ki (hkp@heraldcorp.com)