BOK freezes key rate at 3.25 % for 4th month

South Korea's central bank held steady the key interest rate on Thursday for the fourth straight month as global economic risks heightened and inflation growth moderated. Analysts said that despite a pledge by Bank of Korea (BOK) Gov. Kim Choong-soo to keep the tightening bias, the benchmark rate will likely be held steady at least for the remainder of this year. Earlier in the day, Gov. Kim and his fellow policymakers unanimously froze the benchmark seven-day repo rate at 3.25 percent for October, as widely expected. The rate freeze came as BOK policymakers are in dilemma over juggling between lingering inflation concerns and heightened economic uncertainty sparked by dimmer global economic outlooks and the eurozone debt crisis. "The BOK's stance for policy normalization remains intact. But as the Korean economy cannot be separate from movements of the global economy, we plan to closely take stock of various factors in managing the rate policy," Gov. Kim told a press conference after the rate meeting. The central bank said the Korean economy is likely to be on track for long-term growth, but downside risks to growth are dominant, given a weakening recovery in advanced economies and Europe's debt crisis. "The growth pace of consumer inflation is expected to slow but core inflation will likely keep rising due to inflation expectations," Kim said, referring to inflation excluding volatile food and oil prices. Touching on market speculation over a rate cut, the governor said that the BOK policymakers did not talk about a rate cut at the meeting. Many analysts are betting that the BOK is likely to leave the key rate unchanged for the time being, but some experts even penciled in a chance of a rate cut early next year, citing economic growth concerns. "Downside risks to growth heightened and inflation eased from a peak, which would prevent BOK policymakers from raising the rate," said Park Jong-youn, an analyst at Woori Investment & Securities. "I think that the BOK is expected to freeze the borrowing costs for the time being and may cut the rate in the second quarter of next year on growth concerns." Gov. Kim cut the BOK's 2011 and 2012 growth forecast on Friday, indicating that the export-dependent Korean economy will be inevitably hurt by the global slowdown. The governor said that the Korean economy is likely to grow at a slower pace than the BOK's earlier forecast of 4.3 percent in 2011 although its growth will be higher than 4 percent. He projected that the local economy will likely grow at the low-4 percent range for 2012, slowing from the bank's previous estimate of 4.6 percent. South Korea is facing nagging concerns about high inflation, but the September inflation data gave some excuses to BOK policymakers for freezing the key rate for October. Consumer prices rose 4.3 percent in September from a year earlier, slowing from a three-year high of 5.3 percent in August. But the eased growth of inflation does not mean that upward pressures on consumer prices were dispelled as the local currency's recent weakness is feared to add to price pressure. Consumer prices topped the upper ceiling of the BOK's 2-4 percent inflation target band for the ninth consecutive month, fanning concerns that the BOK will fail to meet its whole-year inflation target of 4 percent. The BOK said in a monetary policy report that it plans to take a cautious approach to managing the rate policy by taking stock of risk factors at home and abroad, spawning speculation that the bleaker global outlooks will lead the BOK to take no action this year. "Growing prospects of the economic downturn may exert high pressure on the BOK to cut the rate. But given lingering inflationary pressure that will continue into next year, the BOK is likely to keep the borrowing costs steady throughout next year," said Shin Dong-jun, a fixed-income analyst at Dongbu Securities Co. The BOK has raised the borrowing costs by a total of 1.25 percentage points in five steps since July of last year in a bid to tame growing inflation risks. Meanwhile, the governor said that it is not appropriate for the BOK to use the foreign exchange reserves as part of tools to support local financial firms. Kang Man-soo, head of KDB Financial Group, recently argued that the BOK needs to open foreign-currency committed lines with local banks by tapping part of the FX reserves in a bid to help them ease a potential liquidity crunch. Gov. Kim also declined to comment on whether the BOK is pushing to seek to open global currency swap lines. Local media reported that South Korea is pushing for a global currency swap scheme during the Group of 20 meetings as part of efforts to strengthen the financial safety net against global market turbulences.