BOK freezes key rate at 2.75%

The Bank of Korea kept its key base rate unchanged at 2.75 percent for four consecutive months on Thursday as various economic indices show signs of recovery both at home and abroad.

The inflation rate in South Korea remained stable, and geopolitical risks from North Korea concerning its provocative weapons tests had very limited effect on the South’s economy.

However, BOK Governor Kim Choong-soo said that uncertainties remain as the U.S. and eurozone, Korea’s two major export markets, are still grappling with fiscal problems, posing a downside risk.

“The global economy is expected to recover, but Europe’s (ongoing) financial crisis and the U.S. spending cuts remain critical risks,” Kim said after a monetary policy committee meeting.

Despite such risk factors, the U.S. economy has been maintaining stable growth, and signs of improvement are apparent in emerging markets.

For instance, China, Korea’s largest export destination, continued its growth momentum in the fourth quarter of 2012, posting nearly 8 percent on-year growth in gross domestic product.

Also, credit default swap premiums on government bonds in Portugal and Spain have dropped, indicating that their sovereign risks are letting up. Portugal’s CDS premium on five-year bonds fell to 378 basis points as of Feb. 13 from 395 bp last month, while that of Spain slid to 255 bp from 269 bp, BOK data showed.

In Korea, exports have been generally decent, with facility investment improving, although it remained in negative territory.

Employment especially among senior citizens and in the services sector increased, the BOK noted.

The number of jobs rose by 322,000 in January, a slight improvement from the 270,000 new jobs in December last year.

Inflation rate continued to stay below the central bank’s target range at 1.5 percent in January. The BOK has set the target of maintaining inflation between 2.5 and 3.5 percent in 2013-2015.

But low consumption has dragged down the economy.

The BOK may have frozen the key rate as the pace of the Korean won appreciation has been slowing down, analysts said.

Peter Park, an analyst at Woori Investment & Securities, said the market “should not rule out the possibility of the central bank lowering its base rate if a weak Japanese yen affects Korean exports.”

Also, given that Thursday’s decision was not unanimous and the incoming government seeks to spur job growth, analyst said the central bank could move to cut its rate in the near future.

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