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BOK freezes key rate, cuts 2014 growth outlook

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(Globalpost/GlobalPost)

By Kim Soo-yeon

SEOUL, Oct. 10 (Yonhap) -- South Korea's central bank froze the key interest rate for the fifth straight month on Thursday while slashing its 2014 outlook for the economic growth amid lingering external uncertainty.

Bank of Korea (BOK) Gov. Kim Choong-soo and his six fellow policymakers unanimously held steady the benchmark seven-day repo rate, or the base rate, at 2.5 percent, as widely expected. The central bank lowered its 2014 growth estimate to 3.8 percent, but maintained its 2013 projection for Korea's economic growth at 2.8 percent.

The rate freeze came as Asia's fourth-largest economy faces lingering external uncertainty such as a potential U.S. debt crisis while the local economy has not yet shown signs of a sustained recovery.

"The global economy is expected to sustain a moderate recovery, but the heightening uncertainties surrounding the U.S. government's budget bill and debt ceiling increase, as well as the likelihood of changes in global markets related to the tapering of U.S. quantitative easing, are acting as downside risks to growth," the BOK said in a statement.

The U.S. government's partial shutdown and congressional deadlock over a deal to raise the U.S. debt limit are stoking some concerns over their negative impacts on the nascent recovery of the world's largest economy.

The Korean government said that the immediate impact on the local market from the U.S. government shutdown is not likely to be significant, but it said it will keep close tabs on any developments as a prolonged impasse could increase market volatility.

Reflecting possible ramifications of lingering downside risks, the BOK lowered its 2014 estimate for the country.

"The Korean economy is expected to maintain negative output gap for a considerable period of time, but that gap will narrow," Governor Kim told a press conference.

The governor said that the BOK will closely monitor developments of external economic conditions such as the U.S. fiscal gridlock.

The International Monetary Fund on Tuesday downgraded its 2014 growth forecast for the Korean economy to 3.7 percent from an earlier estimate of 3.9 percent, citing the low global growth and persisting downside risks.

Korea's inflationary pressure remains subdued as consumer prices are running below the BOK's 2.5-3.5 percent inflation target band. Korea's consumer inflation grew 0.8 percent in September from a year earlier, the slowest pace in 14 years, due to falls in prices of farm products.

The slowing trend of inflation is spawning concerns about risks of disinflation or even deflation in South Korea. The BOK cut its 2013 inflation outlook to 1.2 percent from 1.7 percent, and its 2014 projection was lowered to 2.5 percent from 2.9 percent.

The governor said that inflation will likely pick up to reach near the bottom of the inflation target range next year.

Experts said that the BOK will likely stand pat on the benchmark rate for a considerable period of time and that the bank's next move would be a rate hike.

"The BOK may begin to consider changing its monetary policy direction in the first half of next year when the Federal Reserve ends its bond-buying stimulus program," said Yoon Yeo-sam, a fixed-income analyst at KDB Daewoo Securities Co.

The Fed surprised the market in September by delaying tapering its US$85 billion monthly bond purchases. Fed Chairman Ben Bernanke said in June that the U.S. central bank could start dialing back its bond purchases later this year and possibly end them by mid-2014.

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