Experts pencil in rate freeze for Aug.: poll

SEOUL, Aug. 10 (Yonhap) -- South Korea's central bank is widely expected to freeze the key rate for August as the grim global economic outlook sparked by a U.S. credit downgrade upped external economic uncertainty despite persisting inflation woes, a poll showed Wednesday.
Sixteen out of 17 economists forecast that the Bank of Korea (BOK) will freeze the benchmark seven-day repo rate at 3.25 percent for the second straight month on Thursday, according to the survey by Yonhap Infomax, the financial news arm of Yonhap News Agency.
Analysts said growing external risks including concerns about a U.S. double-dip downturn and Europe's debt woes would lead BOK policymakers to refrain from hiking the rate in August even as Korea's consumer inflation topped the upper limit of the BOK's 2-4 percent inflation target band for the seventh straight month in July.
"The U.S. credit rating downgrade and jitters in global financial markets seemed to guarantee a rate freeze this month. It may be difficult for the key rate to reach beyond 3.5 percent by the year-end," said Ma Ju-ok, an economist at Kiwoom Securities Co.
The poll was re-taken on Tuesday in a bid to factor in the impact of last week's U.S. credit downgrade. In an earlier survey, 10 out of 16 analysts predicted a rate freeze.
Concerns about a global double-dip downturn have heightened after Standard & Poor's lowered the sovereign rating of the U.S. by one notch to "AA+" from a top-tier "AAA" on Friday, sending the global financial markets into a tailspin.
South Korea's key stock index has slid more than 15 percent since last week though it regained some confidence on Wednesday due to the Federal Reserve's vow to support ultra-low rates for at least two years.
The Fed vowed on Tuesday to keep its federal funds rate near zero until mid-2013, promising to support the economy. But its pledge also underpins concerns that it may take a long time for the flagging U.S. economy to pick up.
BOK Gov. Kim Choong-soo told lawmakers on Tuesday that BOK policymakers would make a rate decision by taking into account the recent global market situations, underpinning the view that the central bank may stand pat on the rate this week.
But South Korea is facing high inflationary pressure as a hike in public service charges, rising vegetable prices and continued economic growth are putting upward pressure on inflation.
Consumer prices rose 4.7 percent in July from a year earlier, quickening from 4.4 percent growth in June. Core inflation, which excludes volatile oil and food prices, jumped 3.8 percent on-year in July, the fastest gain in 26 months.
Experts said that heightened external economic uncertainty is raising the chances that the BOK may raise the key rate once more, at best, for the remainder of this year.
"Amplified economic uncertainty is raising downside risks to growth. An economic slowdown and a fall in oil prices would ease inflationary pressure, so the BOK may freeze the key rate through the end of this year," said Shin Dong-jun, a fixed-income analyst at Dongbu Securities Co.
Potential prolongation of current market fears and a grim outlook for the global economy are feared to crimp Korea's exports, which account for about half of its economic output. Some analysts said it may be difficult for Asia's fourth-largest economy to meet its growth target of around 4 percent for this year.
Some argue that the slowing global economy would put a lid on runaway oil prices, which would help ease inflationary pressure in South Korea, the world's fifth-largest crude buyer. South Korea put its 2011 inflation projection at 4 percent.
The BOK estimated that if U.S. economic growth falls 1 percentage point, the growth rate of the Korean economy would decline by 0.44 percentage point and consumer prices would fall by 0.17 percentage point.
The BOK has raised the borrowing costs by a total of 1.25 percentage points since July last year in a bid to tame growing inflation risks.