BOK likely to freeze rate this week

The market is eyeing whether the Bank of Korea will cut its key interest rate when it holds its monetary policy committee meeting Thursday, following Europe’s widely expected rate cut from 0.75 percent to a record low of 0.5 percent last week.

Despite the government’s growing calls for a lower rate to further spur the economy, Korea’s central bank has kept its key base rate unchanged for the last six months, citing an expected recovery toward the latter half of this year.

It seems BOK Governor Kim Choong-soo will likely reach the same decision as before since he has reiterated that the central bank has already done its part in easing its monetary policy.

The government also took its turn devising a fiscal stimulus, Kim told reporters at the Asian Development Bank summit in India last week.

The BOK has implemented a “policy mix” with the government as the central bank already lowered its rate by 0.25 percentage points twice last year.

Those two rate cuts had been “significant,” he said, asking how far it should go down in a country whose currency, the won, is not a key international currency such as the U.S. dollar and the Japanese yen.

Kim had previously mentioned that the risk of increasing capital-flow volatility would rise, should the bank ease its monetary policy like Japan, which has the capability to implement an aggressive monetary easing as the yen is a widely traded global currency.

Thus, the governor stressed the importance of a sound credit policy by increasingly facilitating loans to small and medium enterprises.

With the global economy, including Korea’s economic forecast, looking moderately bright toward the latter half of this year, analysts also seem to accept that the BOK may remain prudent and decline to cut its key interest rate this year.

"We expect the central bank to keep its rate frozen and face limits in cutting it this year as the economy will moderately recover in the second half of this year, despite a slight transitory slowdown in the second quarter,” said June Park, an analyst at Meritz Securities.

The first quarter’s better-than-expected gross domestic product growth of 0.9 percent was another reason the BOK may stick to the same rate, analysts said.

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