BOK freezes key rate for 11th month in a row

The Bank of Korea on Thursday froze the benchmark interest rate for May for the 11th consecutive month, as widely expected, citing persistent fiscal woes in Europe and slow economic recovery at home.

The BOK monetary policy committee unanimously agreed to keep the key seven-day repurchase rate unchanged at 3.25 percent, BOK governor Kim Choong-soo said.

The decision came as the pace of Korea’s economic growth weakened, with consumption and investment dipping while exports maintained sound levels.

Inflationary expectations still remain in the high 3 percent range, but the fiscal turmoil in some eurozone countries and its possible impact on the global economy and Korea’s growth kept the BOK from raising the key interest rate.

Korea’s consumer price inflation fell to a 21-month-low of 2.5 percent in April. Consumer-price gains were cut by government subsidies for childcare and an expanded free school lunch program that started in March.

“The committee does, however, recognize the presence of potentially destabilizing factors such as the high inflation expectations and the geopolitical risks in the Middle East,” Kim said in a news conference at the central bank.

According to survey results released by the Korea Financial Investment Association earlier this week, 156 bond market experts unanimously said they expect the central bank to freeze the rate for May.

After raising borrowing costs by 1.25 percentage points in five steps since July 2010 in a bid to curb inflation, the BOK has frozen the key rate since July last year as global economic uncertainties grew with the prolonged eurozone debt crisis.

“The committee expects the global economy to sustain its recovery, albeit at a moderate pace, and judges that risk factors still exist including the resurgence of sovereign debt problems in Europe stemming from the heightening of political uncertainty, the deepening economic slowdown there, and the geopolitical risks in the Middle East,” Kim said.

“The committee anticipates that the domestic economic growth rate will gradually return to its long-term trend going forward, although downside risks remain due mostly to the impacts of external risk factors.”

The central bank last month lowered its 2012 growth forecast for the country to 3.5 percent from 3.7 percent.

Ronald Man, an economist at HSBC Global Research, said he expects the BOK’s next move will be a hike of 25 basis points in the fourth quarter of this year.

“Unless a severe external shock occurs, the Bank of Korea’s next move will likely be up. The delivery, however, may be sooner than markets expect as headline inflation is set to flare up in the second half of this year,” he said in a report.

“Expect the next move to be a 25bp hike to 3.50 percent in the fourth quarter of 2012.”

By Kim So-hyun (sophie@heraldcorp.com)