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(LEAD) BOK freezes key rate for 4th straight month in Feb.

All Headlines 11:10 February 14, 2013

(ATTN: REWRITES lead; UPDATES with more info in paras 2-6,14)
By Kim Soo-yeon

SEOUL, Feb. 14 (Yonhap) -- South Korea's central bank froze the key interest rate for the fourth straight month on Thursday on signs of the global economy improving, although a stronger won and North Korea's nuclear test pose challenges to Asia's fourth-largest economy.

As widely expected, the seven-member monetary policy committee of the Bank of Korea (BOK) held the benchmark seven-day repo rate steady at 2.75 percent for February. The central bank cut the rate in July and October in 2012.

The BOK said that the Korean economy is expected to continue improving, but economic uncertainties linger like the possibility of fiscal tightening by advanced economies and the Japan's expansionary policy.

"The BOK will closely monitor external risk factors and geopolitical risks in Korea and their impacts in financial and economic conditions while ensuring that growth potential is not eroded by the continuation of low growth," the central bank in a statement.

The rate freeze came despite concerns that Japan's drive for aggressive monetary easing is putting upward pressure on the won, crimping Seoul exports.

Analysts said that the January move came as the U.S. and Chinese economies show signs of recovery and a rate cut is not seen as effective in stemming the won's gain.

"As a set of economic data from the U.S. and China shows signs of improvement, the BOK seemed to opt for not cutting the key rate," said Kong Dong-rak, a fixed-income analyst at Hanwha Investment & Securities Co.

"It is more likely for Korea to unveil stronger rules to stem currency volatility, including a tax on financial transactions. And North Korea's latest nuke test is not seen as a factor in changing the rate policy."

The Korean economy, which grew at the 3-year low of 2 percent last year, is widely expected to recover from the second half of this year after bottoming out late last year.

Economic data at the domestic front largely turned better. Seoul's exports rebounded in January and Korea's factory output extended on-month growth for the fourth straight month in December. Inflationary pressure is deemed benign as the January consumer inflation remained below the BOK's 2.5-3.5 percent target band.

What unnerves Korean policymakers is the local currency's high volatility. The won's volatility has increased since Japan last month announced its plan to implement an open-ended asset-buying program, a move seen as weakening its currency.

But according to the January minutes, BOK policymakers believe high currency volatility should be stemmed. Some raised questions, however, whether the monetary policy would have impacts on curbing capital flows.

Market watchers said that North Korea's third nuclear test conducted on Tuesday did not seem to affect the BOK's monetary policy direction as geopolitical risks have been already factored in the market.

The government said that the nuclear test seems to have had a limited impact on the financial markets and the Korean economy so far, but it will take market-stabilizing measures if needed as geopolitical risks can increase, given Pyongyang's possible additional provocations.

Analysts are quite divided over the central bank's next move, but more experts said that the BOK may lower the borrowing costs, possibly in March or the second quarter, after taking into account the incoming government's economic stimulus packages.

President-elect Park Geun-hye is set to take office on Feb. 25 with pledges to support smaller firms and debt-stricken households.

"Right after the new government takes office, a rate cut is likely to come as a symbolic gesture to go side by side with the government to prop up the growth," said Lee Sung-kwon, a senior economist at Shinhan Investment Corp.


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