BOK freezes key rate at 3.25 pct for 2nd month

SEOUL, Aug. 11 (Yonhap) -- South Korea's central bank froze the key interest rate on Thursday for the second straight month as the grim global economic outlook sparked by a U.S. rating cut upped external economic uncertainty despite persisting inflation woes.
Bank of Korea (BOK) Gov. Kim Choong-soo and his fellow policymakers held steady the benchmark seven-day repo rate at 3.25 percent for August.
The decision is in line with a forecast by 16 out of 17 economists surveyed by Yonhap Infomax, the financial news arm of Yonhap News Agency.
Analysts said growing external risks such as concerns about a U.S. double-dip downturn and Europe's debt woes prevented the board members from hiking the rate 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.
"Last week's U.S. credit rating downgrade and jitters in global financial markets seemed to warrant a rate freeze this month. It may be difficult for the key rate to reach beyond 3.5 percent by year-end," Ma Ju-ok, an economist at Kiwoom Securities Co., said before the decision.
Concerns about a global double-dip downturn have heightened after Standard & Poor's lowered the U.S.'s sovereign rating 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 due to worries about the fragile U.S. economy and the eurozone's debt fears.
The Federal Reserve vowed on Tuesday to keep its federal funds rate near zero at least through mid-2013, adding that it is considering employing additional easy money policies if necessary. But its pledge also underpins concerns that it would take longer for the flagging U.S. economy to pick up.
Gov. Kim told lawmakers on Tuesday that the BOK policymakers would make a rate decision by taking into account the recent global market situation and economic conditions, spawning speculation that a rate freeze would come in August.
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 is likely to 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 the 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.
Others also 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 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.