BOK leaves rate unchanged

The Korean central bank, as expected, left the key borrowing rate unchanged at 2.5 percent yesterday, indicating close monitoring of global and Korean market movements as well as the effect of stimulus initiatives including the supplementary budget and rate cut made in May.

Market experts saw significance in the fact that yesterday’s decision was unanimous among the seven members, including central bank’s Gov. Kim Choong-soo, of the monetary policy committee.

“This suggests the central bank is back in wait-and-see mode,” said Ronald Mann, HSBC economist.

Mann added that the central bank is monitoring the effect of last month’s rate cut and government economic policies, especially the 17 trillion won supplementary budget approved by the National Assembly.

“Given that monetary policy takes about three months to filter through the economy, this reduces the probability of a further rate cut for the time being,” Mann said.

HSBC projects the central bank will keep the rate at 2.5 percent until the third quarter next year.

The central bank in May lowered the rate from 2.75 percent, the first change since October.

The governor since early this year has expressed concern over the possible pullback of the stimulus programs in advanced countries. Premature ending of quantitative easing could disrupt Korea’s market as foreign investors pull out capital in emerging markets like Korea.

This month, pressure on the Korean central bank has eased as other central banks also froze their benchmark borrowing rates.

“The course of growth is within the line of our projection,” said Kim . “And there have been no signs of capital outflow after the rate cut.”

In the first quarter, the economy grew 0.8 percent, which is 0.1 percentage point less than an earlier assessment by the central bank. Quarterly growth has remained less than 1 percent since the second quarter of 2011.

Although facilities investment has fallen while consumer spending still remains down, exports grew more than 3 percent year-on-year despite the weak yen.

The central bank in its report yesterday said both the global and Korean economies, although still weak, are on a mild recovery course.

The bank projects the economy will expand 2.6 percent this year and 3.8 percent the next.

“The rate cut in addition to the supplementary budget will add at least 0.2 percentage point to this year’s economic growth and 0.3 percentage point to next year’s,” Kim said.

“As a result, next year we may achieve 4 percent growth, which is higher than what we projected earlier.”

Currently, the only threat the central bank sees is an early end to the stimulus program in the United States, which has also affected Korea’s stock market

BY LEE HO-JEONG [ojlee82@joongang.co.kr]