BOK holds key rate steady as expected

Korea’s central bank left the key interest rate unchanged yesterday for the ninth straight month, as rising oil prices threaten to add to inflationary pressure and fragile signs of economic revival at home and abroad continue to challenge policy makers.

Meanwhile, the head of the central bank refuted views that the base rate should be raised in order to tamp down Korea’s snowballing household debt, saying that such macroeconomic measures should only be considered a last resort.

Bank of Korea Governor Kim Choong-soo and his five fellow policy makers froze the benchmark seven-day repo rate at 3.25 percent for March, as widely expected.

At the subsequent press conference, Kim rebutted the recent view put forth by state-run think tank Korea Development Institute that the base rate should be gradually raised to help rein in household debt.

“Microeconomic measures such as debt restructuring for indebted households should be carried out first before considering other methods,” he said.

Kim said it is unlikely that the nation’s growing household debt will ever trigger widespread defaults in financial companies comparable to the U.S. subprime mortgage crisis, “as Korea has regulations such as loan-to-value ratio caps.”

The central bank cut the benchmark rate by 3.25 percentage points to a record low of 2 percent between October 2008 and February 2009 in the wake of the global financial crisis. Since July 2010, it has raised borrowing costs by 1.25 percentage points in five steps to curb inflation.

The latest decision again reflected how little room the central bank has to move between high inflation and the fragile state of economic growth in the country.

Even as Korea’s inflation rate eased to a 14-month low last month, the Bank of Korea committee remained relatively wary of price gains because of expectations that inflation will stay high and global oil prices may rise further from the current level of around $120 per barrel.

The policy committee added a phrase in this month’s statement that it will be “endeavoring to lower expectations of inflation,” upping its rhetoric from the previous month when it said such expectations will be closely monitored.

The latest Bank of Korea poll showed that the median expected inflation forecast for the coming 12 months stands at 4 percent, hovering around the ceiling of the central bank’s target band of 2 to 4 percent. Korea’s consumer price index rose 3.1 percent on-year in February.

The committee’s evaluation of the domestic and global economies carried a slightly more optimistic tone than last month’s, as the unrest in the international financial markets has eased.

“For Korea, the committee appraises that economic growth has not slowed any more,” Governor Kim said. “Although construction investment has been sluggish, consumption and facilities investment have increased and exports have expanded.”

But the Bank of Korea chief added that it is too early to resume tightening its accommodative stance, as the European Union’s debt woes and geopolitical risks from the Middle East continue to pose challenges to the domestic economy.

Analysts said that the governor’s remarks made it more likely that the rate would be frozen for the remainder of the year, watering down the view that the central bank may resume tightening after the second quarter.

By Lee Jung-yoon, Yonhap [oyce@joongang.co.kr]