BOK freezes key rate at 3.25 pct on external risks

(ATTN: RECASTS headline; UPDATES with remarks by BOK head in paras 3-9,14)
By Kim Soo-yeon
SEOUL, July 14 (Yonhap) -- South Korea's central bank froze the key interest rate on Thursday, following a rate hike in June, as external economic uncertainty like the eurozone debt crisis persists despite inflation risks.
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, as widely expected.

The decision, which was unanimous, came after the BOK surprised the market in June by delivering a rate hike earlier than expected. The bank raised the borrowing costs by a combined 1.25 percentage point since July last year.
The BOK said a potential spread of the eurozone debt crisis and the chance of an economic slowdown in the U.S. will serve as downside risks to the Korean economy while inflation will continue to maintain a strong upward trend.
"The BOK froze the rate as the bank needs to gauge the impact of the rate hike and to check economic conditions at home and abroad," Gov. Kim told a press conference.
"The eurozone debt crisis would have a limited impact on the Korean economy, but if the problems get serious, they could have a considerable effect on Korea indirectly, as large part of foreign capital comes from Europe," he added.
Global financial markets have been gripped by fears that Greece's sovereign crisis might spread to Italy and Spain. Concerns about the pace of the U.S. economy's recovery 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 the third round of the quantitative easing, known as QE3.
Gov. Kim said any type of quantitative easing in the U.S. could affect global liquidity and capital movements, but the potential impact of QE3 on the Korean economy could be measured only after details about QE3 come out.
The governor noted that snowballing household debt was one of factors which were taken into account in decision on the rate freeze.
South Korea is grappling with growing household debt, which surpassed the 800 trillion won (US$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.
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.
South 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.
"Oil prices are not likely to go up much although they are unlikely to substantially fall so as to stabilize inflation, either," Kim said.
Finance Minister Bahk Jae-wan has said that South Korea should take "all possible policy measures" to tame inflation as high prices could undermine the economic recovery and hurt people's livelihoods.
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."