BOK freezes key rate at 3.25 percent for 5th month

South Korea's central bank left the key interest rate unchanged on Friday for the fifth straight month in the face of the deepening eurozone debt crisis and moderated inflation growth.

Bank of Korea (BOK) Gov. Kim Choong-soo and his fellow policymakers froze the benchmark seven-day repo rate at 3.25 percent for November, as widely expected.

The central bank said that the local economy is likely to be on a trend toward long-term growth, but downside risks to growth remain high due to external risk factors.

"The global economy is likely to show moderate recovery, but downside risks to growth are seen as high, given Europe's sovereign debt crisis, sluggish growth of major economies and a possible continuation of global market jitters," the BOK said in a statement.

The central bank said that it will focus on keeping price stability while supporting economic growth, but it dropped the phrase of "with greater emphasis" on ensuring maintaining price stability.

Analysts said that dimmer outlooks for the global economy and nagging concerns about Europe's sovereign crisis prompted the BOK policymakers to hold the rate steady for this month.

The country's consumer inflation in October stayed below the upper ceiling of the BOK's 2-4 percent inflation target band for the first time this year, which underscored the central bank's decision to freeze the rate, they added.

"The BOK seems to be in a dilemma amid conflicting risks of the global slowdown and lingering inflationary pressure," said Jason Lee, an analyst at KB Investment & Securities Co.

"But high external uncertainty and growth concerns are likely to lead the BOK to consider a rate cut next year."

European leaders are scurrying to stem the region's sovereign stress, but fears that Greece's debt crisis is spreading into larger countries such as Italy gripped the global financial markets this week. Italy's bond yields surged to above 7 percent on Wednesday, chilling investor sentiment.

Growth concerns led the European Central Bank (ECB) and several central banks in emerging countries to cut their interest rates, a move to prevent heightened economic uncertainty from hurting their growth momentum.

The Korean economy grew 0.7 percent on-quarter in the third quarter, slowing from 0.9 percent in the preceding quarter, on weaker consumer spending and faltering facility investment.

Gov. Kim slashed the central bank's 2011 and 2012 growth forecast, indicating that the global slowdown will hurt the export-dependent Korean economy inevitably.

Analysts said that the slowed growth of inflation also lent support to the BOK's rate freeze this month, although that does not mean inflation concerns have been dispelled.

In October, Korea's consumer prices rose 3.9 percent from a year earlier, slowing from a 4.3 percent on-year gain the previous month. Consumer inflation surpassed the upper limit of the BOK's

2-4 percent inflation target zone for the ninth consecutive month in September, but fell below the ceiling for the first time this year last month.

Experts forecast that the BOK will likely leave the rate unchanged for the time being, but presented mixed outlooks about the possibility or timing of a rate cut next year.

The ECB's surprise rate reduction and continued speculation about the Federal Reserve's additional quantitative easing steps underscore efforts by global central banks to shield their economies from the heaviest blows of the global downturn.

Some argue that the BOK is likely to be aligned with global central banks' move to cut the benchmark rates, but others claim that still-high inflation and Korea's economic fundamentals may prevent the BOK from cutting borrowing costs.

"When consumer price growth slows to below the mid-3 percent range, I think the BOK may lower the rate one or two times next year," said Yoon Yeo-sam, a fixed-income analyst at Daewoo Securities Co.

The BOK has raised the key rate from a record low of 2 percent since July last year in a bid to tame inflation. In the height of the global financial crisis, the bank cut the rate by a total of

3.25 percentage points from 5.25 percent between October 2008 and February 2009. (Yonhap News)