ID :
194981
Thu, 07/14/2011 - 09:38
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https://oananews.org//node/194981
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BOK freezes key rate at 3.25 pct on external risks
(3rd LD) 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 heightened, 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 governor 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 a large part of foreign capital comes from Europe," he added.
The global financial markets have been gripped by concerns that Greece's sovereign crisis might spread to Italy and Spain. On Friday, European Union leaders are slated to hold an emergency meeting amid fears of a selective default by Greece.
Federal Reserve Chairman Ben Bernanke said Wednesday the Fed is prepared to ease monetary policy further if necessary, hinting at the possibility of a third round of the quantitative easing, called QE3.
Gov. Kim said any type of the quantitative easing 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 the factors that was taken into account in its decision to freeze the interest rate.
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 their lending practices.
"The country should tackle household debt problems in a consistent manner as they cannot be solved overnight," the governor said.
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 in August or September after gauging external economic uncertainty.
"Inflation concerns still persist, but downside risks to growth have also heightened. One more hike is expected this year, possibly in September," said David Kim, an economist at Taurus Investment & Securities Co.
Yum Sang-hoon, a fixed-income analyst at SK Securities Co., said a rate increase is likely to come in August and one more in the fourth quarter, adding that the Korean economy is well on the recovery track while core inflation is quickly rising.
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 governor 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 a large part of foreign capital comes from Europe," he added.
The global financial markets have been gripped by concerns that Greece's sovereign crisis might spread to Italy and Spain. On Friday, European Union leaders are slated to hold an emergency meeting amid fears of a selective default by Greece.
Federal Reserve Chairman Ben Bernanke said Wednesday the Fed is prepared to ease monetary policy further if necessary, hinting at the possibility of a third round of the quantitative easing, called QE3.
Gov. Kim said any type of the quantitative easing 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 the factors that was taken into account in its decision to freeze the interest rate.
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 their lending practices.
"The country should tackle household debt problems in a consistent manner as they cannot be solved overnight," the governor said.
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 in August or September after gauging external economic uncertainty.
"Inflation concerns still persist, but downside risks to growth have also heightened. One more hike is expected this year, possibly in September," said David Kim, an economist at Taurus Investment & Securities Co.
Yum Sang-hoon, a fixed-income analyst at SK Securities Co., said a rate increase is likely to come in August and one more in the fourth quarter, adding that the Korean economy is well on the recovery track while core inflation is quickly rising.
