BOK freezes base rate for 6th straight month

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BOK freezes base rate for 6th straight month

The Bank of Korea froze the key interest rate for the sixth month in a row yesterday as it attempts to steer its monetary policy between rising inflation and expectations of an economic downturn due to external uncertainties in Europe and the United States.

BOK Governor Kim Choong-soo and other members of the Monetary Policy Committee kept the base rate at 3.25 percent in a largely-expected, unanimous decision yesterday. The rate has now been frozen since June, when it was hiked by 25 basis points.

“Downside risks to growth are high, due mostly to the sovereign debt crisis in Europe and the possibility that the slumps being experienced by major economies will continue, along with unrest in international financial markets,” the committee said in a statement.

Although some key lenders, such as the European Central Bank, have recently lowered their base rates, Kim said that the downturn Korea is facing is less of a problem than those unfolding in other major economies.

His remark prompted some observers to interpret this as an oblique disavowal of any short-term rate cuts.

“We are taking our cue from the fact that during the 2008 financial crisis, the base rate of 5.25 percent in September [of that year] was lowered to just 2 percent in the space of four months,” Kim said when grilled on what could provoke the central bank to trim the rate.

“We’re not seeing the onset of a mild recession,” he added.

However, many foreign analysts say a rate cut during the first half of next year is likely. They also forecast a drastic economic slowdown for the country in that period.

“After the anticipated negative GDP growth and slowing inflation in the first quarter, we expect policy makers to enact a supplementary budget and cut interest rates,” said Kwon Young-sun, an economist at Nomura Holdings.

“We forecast the BOK will cut policy rates by 25 basis points in April and again in July to end at 2.75 percent.”

HSBC economist Ronald Man also said in an e-mailed commentary that he expected “one 25 basis point cut in the first quarter of 2012.”

“Although the governor stated that the central bank retains its normalization stance, he also highlighted that Korea’s neutral rate may now be lower than previously assumed,” he added.

The neutral rate refers to the key interest rate that keeps inflation within the central bank’s target band.

Yesterday’s decision to hold the base rate steady for a sixth month came despite last month’s consumer price index overshooting the central bank’s inflation target band of 2 percent to 4 percent by reaching 4.2 percent on-monthly growth.

The BOK has hiked the base rate three times this year - in January, March and June - as high inflationary pressure has attracted criticism even from state-run think tanks such as the Korea Development Institute.

“Although the [BOK’s] expansionary monetary policy during the financial crisis seems to have buffered the shock to a notable extent, the growth rate of consumer prices is continuously overshooting targets,” the Korea Development Institute said in a report last month.

By Lee Jung-yoon []

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