BOK stays the course on benchmark interest rate

Bank of Korea Governor Kim Choong-soo opens this month’s monetary policy meeting at the central bank’s headquarters in central Seoul yesterday. The policy committee has decided to freeze the benchmark rate at 2.75 percent. [NEWSIS]

The Bank of Korea’s decision to freeze the benchmark interest rate is seen as a move to align its monetary policy to that of the incoming Park Geun-hye administration.

Yesterday, the BOK monetary policy committee kept the key rate at 2.75 percent unchanged for the fourth straight month, citing hints that the global economy might be on track for recovery.

Park, who will be inaugurated Feb. 25, hasn’t unveiled her economic policy direction for the next five years.

The decision of the central bank has nothing to do with the upcoming political transition, BOK Governor Kim Choong-soo said yesterday.

However, for the past five years, the BOK has been in step with the Lee Myung-bak administration’s economic policy prioritizing economic growth.

The governor earlier told foreign correspondents in Seoul that it is desirable to make the central bank’s monetary policy jibe with the government’s economic policy.

The BOK kept raising the key rate from 2010 through June 2011 to bring its monetary policy in line with the Lee administration’s emphasis on growth. The rate was 2.25 percent in July 2010 and reached 3.25 percent in June 2011.

During the same period, consumer prices continued rising until they hit an annual rate of 4 percent at the end of 2011. Then, the BOK decided to freeze the rate from July 2011 through June 2012.

The central bank and the government were under pressure from the public on rising inflation.

Owing to the harmony between the central bank and the government, the country’s inflation rate started declined to the 1 percent range by the end of last year.

“The central bank is probably considering a policy mix with the new government,” said Jeon Hyo-chan, a researcher at Samsung Economic Research Institute.

“It is unlikely that the BOK would take the lead in boosting the economy by cutting the key rate before the new government unveils its economic policy.”

A major reason for freezing the key rate, the BOK cited encouraging signs in the United States and Chinese economies.

Indicators recently showed some improvement in the U.S. housing market and consumer spending, and the Chinese economy is forecast to grow 8 percent this year. In addition, the Korean central bank also judged that euro zone countries have avoided the worst possible scenario as the region’s exports started to rebound.

The BOK also took a hopeful view of the domestic economy, saying the GDP in the fourth quarter last year inched up 0.1 percentage point from the third quarter.

The country’s exports grew 11.8 percent in January, which turned out to be higher than expected. Output of the mining and manufacturing industries rose 1 percent, the fourth consecutive month of growth.

According to a report by Statistics Korea on Wednesday, a total of 322,000 jobs were added to payrolls in January and the unemployment rate dropped 0.1 percentage point to 3.4 percent.

Some analysts said the BOK had to freeze the rate due to worries about price hikes in fresh food, triggered by unexpectedly harsh weather conditions this winter.

However, market watchers say the central bank could slash the rate soon in response to Japan’s indefinite quantitative easing.

Foreign investment banks like Citi, JP Morgan and Deutsche Bank, had earlier expected the BOK to cut its rate by 0.25 percentage point in response to the economy’s fragile due to uncertainties outside the country.

“There are possibilities that the central bank could make a decision later to cut the rate due to external factors like the falling yen and geopolitical risks on the Korean Peninsula, including the latest nuclear test by North Korea,” said Yoo Byung-kyu, a researcher at Hyundai Research Institute.

However, Moody’s Analytics, a research institute under international credit rating agency Moody’s, released a report on Wednesday saying the low Japanese yen doesn’t have a negative impact on the Korean economy.

“The falling Japanese yen and strengthening Korean won are proof of global recovery, and it is natural to see such currency moves when the global economy starts reviving,” said the report. “If the outlook for the Japanese economy gets better, demand for Korean products would also rise in tandem.”

It had predicted the BOK was likely to maintain the key rate at the current level, since the Korean economy is continuing to show steady recovery.

By Song Su-hyun [ssh@joongang.co.kr]