(3rd LD) BOK freezes key rate at 3.25 pct for 3rd month

(ATTN: UPDATES with more info in paras 2,3,6,17-20; TRIMS throughout)
By Kim Soo-yeon
SEOUL, Sept. 8 (Yonhap) -- South Korea's central bank froze the key interest rate on Thursday for the third straight month as signs of the slowing global economy and eurozone debt crisis outweighed persisting inflation woes.
Bank of Korea (BOK) Gov. Kim Choong-soo hinted that its tightening cycle will go on at a measured pace in a bid to gauge the impact of economic uncertainty on the economy, causing analysts to bet that there will be no additional rate hikes for the remainder of this year.
Earlier in the day, Gov. Kim and his fellow policymakers held the benchmark seven-day repo rate steady at 3.25 percent for September, as widely expected.
"Inflation stayed at a high level, but as Korea is highly dependent on external economic conditions, I think that it is proper to closely take into account such factors," Gov. Kim told a press conference.
"If external conditions continue to remain unstable, we cannot raise the rate ... If economic uncertainties remain at a manageable level, we are able to go toward policy normalization. But we also cannot go recklessly if they are unstable."
But he downplayed the possibility of a rate cut, saying that the current economic growth momentum does not warrant one.
The decision, which was not unanimous, came as external risks, like concerns about a U.S. double-dip downturn and Europe's sovereign woes, heightened while the August inflation rate hit a three-year high.
Seemingly mindful of criticism that the BOK has been behind the curve in raising the rate, Gov. Kim stressed that the central bank's gradual tightening cycle would continue, citing chances that the full-year inflation will top 4 percent.
The governor said the pace of inflation will slow somewhat as prices of agricultural products may decline, but that does not mean that inflation pressure is easing.
"It seems to be very challenging for the central bank to meet its full-year inflation target of 4 percent," the governor noted.
The rate freeze came amid a delicate situation where the global economy is showing signs of sputtering while on the domestic front, Korea's consumer prices surpassed the upper end of the BOK's 2-4 percent inflation target band for the eighth consecutive month.
The prospects for the global economy are getting bleaker as the first-ever U.S. credit downgrade and the eurozone sovereign risks are raising concerns that the global economy may slide back into a recession.
Finance Minister Bahk Jae-wan said last week that the government could revise down its growth outlook for this year, which currently stands at 4.5 percent, citing external economic headwinds. The BOK's 2011 growth forecast stood at 4.3 percent.
Korea's data on trade and industrial output also point to the slowing growth of the economy. The country's trade surplus shrunk to US$821 million in August on record imports and its industrial output grew at the slowest pace in 10 months in July.
But even in the face of slowing growth, Korea is facing high inflationary pressure due to a hike in public service charges, high oil and vegetable prices and continued economic growth.
Consumer prices jumped 5.3 percent in August from a year earlier, quickening from 4.7 percent growth in July. Core inflation, which excludes volatile oil and food prices, rose 4 percent on-year in August, the sharpest gain in 28 months.
Analysts are divided over whether the BOK will be able to hike the rate once more or freeze it for the rest of the year.
"The BOK seemed to focus on coping with the potential economic slowdown, rather than inflation jitters," said Ju Lee-hwan, an economist at Eugene Investment & Securities Co.
"After the fall harvest holiday, the growth of consumer prices may slow down on falling food prices and I predicted a rate freeze for the remainder of this year."
But Gong Dong-rak, a fixed-income analyst at Taurus Investment & Securities Co., said that there is still a chance of a rate hike within this year, possibly in November or December, but such possibility also hinges on how the global economic situations unfold.
The rate freeze also came as South Korea is grappling with snowballing household debt, which reached 876.3 trillion won (US$818.7 billion) as of end-June.
Korean households' massive debt is the main drag on the economy as it is feared to curb consumer spending, thereby hurting economic growth.
Recently, the head of the financial watchdog made a rare call for the BOK to play its part in curbing household debt, remarks widely viewed as urging the central bank to hike the key rate.
A rate hike increases households' burden to service debt, but a delay in raising the borrowing costs also aggravates their indebtedness.
The BOK has raised the borrowing costs by a total of 1.25 percentage points since July of last year in a bid to tame growing inflation risks.