BOK freezes key rate at 3.25%

Korea's central bank froze the key interest rate on Thursday, following a rate hike in June, in the face of mounting household debt and the eurozone debt crisis.

Bank of Korea (BOK) Gov. Kim Choong-soo and his fellow policymakers held steady the benchmark seven-day repo rate, dubbed the base rate, at 3.25 percent for July.

The decision is in line with a forecast by 18 out of 19 economists surveyed by Yonhap Infomax, the financial news arm of Yonhap News Agency.

"A back-to-back rate hike would increase households' debt burdens and have a negative impact on the economic recovery. The rate freeze came as the bank might want to assess the fallout from June's rate hike on the economy," said Kim Yoon-gee, a senior economist at Daishin Economic Research Institute.

In June, the BOK surprised the market by delivering a rate hike earlier than expected, citing growing inflationary pressure spurred by the economic recovery. The bank raised the borrowing costs in January, March and June.

Analysts said the BOK left the rate unchanged for July in a bid to gauge the impact of a June rate increase on the economy and to prevent households from shouldering too much of a burden for debt repayment.

Korea is grappling with snowballing household debt, which surpassed the 800 trillion won ($748.8 billion) mark on the back of a long streak of low rates and the economic recovery. Last month, the government unveiled a set of measures to curb growing household debt by tightening banks' loan-to-deposit ratios and mending banks' lending practices.

Lingering economic uncertainty also serves as a downside risk to growth, causing BOK policymakers take a cautious stance in gauging the timing of a rate increase.

Global financial markets have been gripped by fears that Greece's sovereign crisis might spread to Italy and Spain. Concerns about the recovery pace of the U.S. economy persist as Federal Reserve Chairman Ben Bernanke said Wednesday the Fed is prepared to ease monetary policy further if necessary, hinting at the possibility of additional liquidity injection.

European Union leaders did not rule out the chance of a selective default by Greece, and Moody's Investors Service downgraded the credit ratings of Portugal and Ireland to junk.

But the rate freeze also came despite concerns about inflation, which topped the upper ceiling of the BOK's 2-4 percent inflation target band for the sixth consecutive month in June.

Korea's consumer prices rose 4.4 percent in June from a year earlier, up from a 4.1 percent on-year expansion in May.

Core inflation, which excludes volatile oil and food costs, grew 3.7 percent on-year in June, the fastest expansion in over two years, accelerating from 3.5 percent in May. Rising core inflation indicates that demand-pull inflationary pressure is growing.

Finance Minister Bahk Jae-wan has said that Korea should take "all possible policy measures" to tame inflation as high prices could undermine the economic recovery and hurt the livelihoods of people.

Last month, the government cut its growth outlook for this year to 4.5 percent while revising up its projection of 2011 inflation to 4 percent from an earlier 3 percent. The BOK's inflation forecast stood at 3.9 percent and it will unveil its revised economic outlook on Friday.

Experts said as the BOK took a pause this month, it may resume its tightening cycle as early as August after gauging external economic uncertainty like Europe's debt crisis and a sputtering U.S. recovery.

"The BOK is likely to freeze the rate for July. But as there are high chances that inflation will likely stay high in the second half and core inflation is quickly rising, efforts to stabilize prices are all the more needed," said Lee Sang-jae, an economist at Hyundai Securities Co. "The BOK may raise the rate twice more to 3.75 percent by the end of this year." (Yonhap News)