No change in BOK rate

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No change in BOK rate

Korea’s central bank took a precautionary step yesterday and froze the benchmark key rate for the seventh consecutive month.

Bank of Korea Governor Kim Choong-soo said the monetary policy committee unanimously agreed to hold the key rate at 2.5 percent. The benchmark rate has remained the same since a 0.25 percentage point reduction in May to support the Park Geun-hye administration’s attempts to stimulate the economy that had sub-1 percent quarterly growth dating to 2011.

Since the second quarter, the Korean economy has been on a recovery track as quarterly growth has exceeded. Many expect the current course to continue, reaching the central bank’s target of a 2.8 percent annual expansion after 3.6 percent year-on-year growth in the second half, largely thanks to recovery in advanced economies, including the U.S., and improving private consumption and private sector investment in facilities and machinery. In the first half, the economy grew 1.9 percent year-on-year.

The Korean central bank’s decision came a week ahead of the U.S. Fed’s meeting scheduled for Tuesday.

Speculation is mixed as to what steps the U.S. Fed might take in regard to reducing its unprecedented quantitative easing. While some expect the U.S. central bank to hold off on downsizing until sometime in the first half of next year, several Fed members have hinted they want a vote in favor of tapering as soon as possible.

Earlier this week, St. Louis Federal Reserve Bank President James Bullard, according to a report by Bloomberg, was in favor of ending the stimulus program.

“Based on labor-market data alone, the probability of a reduction in the pace of asset purchases has increased,” Bullard said.

The U.S. unemployment rate fell to the five-year low of 7 percent last month, edging close to the 6.5 percent outgoing Fed Chairman Ben Bernanke has set as a condition for tapering.

Some local market experts insist the Korean central bank should be lowering the benchmark rate to further stimulate the economy before the Fed acts. They argued that although the Korean economy has turned around and there has been some improvement, recovery momentum is weak, and once the United States starts pulling back on its asset-buying program, it could curb the nation’s economic growth.

However, the central bank showed no intention of making changes in the immediate future. “The effect of the lowered interest rate in May will continue for a year or a year and a half,” said Kim.

A statement distributed prior to the BOK governor’s press conference said that although inflation is stable, it will tend toward growth in the near future. This can be interpreted as the Korean central bank having no intention of lowering the key rate until the first half of next year.

Meanwhile, the governor raised concerns about the weak Japanese yen. “While the overall country has been fairly good in weathering the impact of the weakening yen, several industries such as steel and electronic goods that are closely related to Japan has been suffering losses,” Kim said. “We are closely monitoring the situation.”

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