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(3rd LD) BOK unexpectedly freezes key rate for 2nd month

All Headlines 14:27 September 13, 2012

(ATTN: RECASTS lead; UPDATES with more info in paras 7,11,18,21)
By Kim Soo-yeon

SEOUL, Sept. 13 (Yonhap) -- South Korea's central bank unexpectedly froze the key interest rate for the second straight month on Thursday in an apparent bid to save ammunition for any worsening of economic conditions at home and abroad.

Bank of Korea (BOK) Gov. Kim Choong-soo and his fellow policymakers unanimously left unchanged the benchmark 7-day repo rate at 3 percent for September. The decision surprised the market as most analysts had predicted a rate cut this month.

The BOK froze the key rate last month after delivering a surprise cut in July in a bid to cushion the bitter impact of the eurozone debt crisis on the local economy.

The decision came as several global central banks are set to take quantitative easing steps to prop up growth, dogged by the eurozone debt turmoil.

BOK Gov. Kim said the current level of the key rate does not seem to have deviated much from a neutral level.

"The BOK policymakers will make their rate decision flexibly based on the latest data available every month," the governor said at a press conference, indicating the bank's rate policy direction will hinge on the development of external economic risks.

He said that although expectations for a rate cut prevailed in the market, the decision on when to take action will be based on the BOK board members' assessment of economic situations.

Analysts said the BOK might need more data and time to assess the development of the eurozone debt turmoil. They said the BOK is still open to cutting the rate to 2.75 percent in October, but a handful of analysts claimed the BOK would not be aggressive in cutting the rate this year.

"The BOK policymakers seemed to take a pause to see how external economic conditions unfold as the eurozone debt crisis has showed some signs of stabilizing," said Jeon Hyo-chan, a research fellow at the Samsung Economic Research Institute.

"The rate freeze also intended to save ammunition to brace for any worsening of economic conditions and I think that chances of a rate cut within this year still remain intact."

Bond futures declined on market players' disappointment over the rate-freeze decision. The returns on three-year and five-year treasury bonds have stayed below the key rate of 3 percent due to a rate cut prospect.

The South Korean economy is losing steam on faltering exports and sluggish domestic demand while consumer prices slowed to the 1 percent range last month, running below the BOK's 2010-2012 inflation target band of 2-4 percent.

The South Korean economy grew 0.3 percent on-quarter in the second quarter, a third of the first-quarter growth. The BOK's 2012 growth forecast stood at 3 percent, but economists are expecting the full-year growth to slow to the 2-percent range.

The country's exports and imports contracted in July and August, indicating that demand at home and abroad is shrinking amid the global economic slowdown.

On Monday, the government unveiled an additional 5.9 trillion won (US$5.23 billion) worth of measures to boost domestic demand, adding to its planned 8.5 trillion won-fiscal spending announced in June. But many analysts said that the stimulus measures may have a limited impact on bolstering the growth, adding that a rate cut might be the only card available for policymakers.

Korea's inflationary pressure has been slowing on retreats in oil prices and slowing economic growth, analysts say.

The country's consumer prices grew 1.2 percent on-year in August, marking the slowest growth in more than 12 years, according to the statistics agency.

"Consumer inflation is expected to remain below the median target of 3 percent for the time being, even as the recent typhoon and unstable oil and grain prices could raise the inflation growth rate," the BOK added.

Meanwhile, instead of cutting the policy rate, the BOK decided to expand its financial support to smaller firms and low-income self-employed people.

The policy committee decided to expand the size of its soft loans on small and medium enterprises by 1.5 trillion won to 9 trillion won in a bid to help ease their funding squeeze.

The volume of the increased money will be used for the low-income self-employed with low creditworthiness in an effort to make soft-landing of household debts. The move will take effect starting in October.

The BOK slashed the key rate by 3.25 percentage points to a record low of 2 percent between October 2008 and February 2009 to fight global financial turmoil. The bank raised it five times between July 2010 and June 2011 to curb inflationary pressure.



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