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BOK freezes key rate for 12th straight month in May

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(Globalpost/GlobalPost)

By Kim Soo-yeon

SEOUL, May 9 (Yonhap) -- South Korea's central bank froze the key interest rate for the 12th straight month on Friday amid concerns that the deadly sinking of the passenger ferry Sewol is feared to diminish consumer spending.

Bank of Korea (BOK) Gov. Lee Ju-yeol and his five fellow policymakers held the benchmark seven-day repo rate, called the base rate, at 2.5 percent as widely expected.

The BOK said that the Korean economy is expected to maintain its uptrend, but uncertainties related to domestic demand have increased, influenced by the recent ferry accident.

The central bank said that the monetary policy committee will pay close attention to external risk factors such as shifts in major countries' monetary policies and closely monitor the movements in domestic demand following the ferry sinking.

Analysts said that the Korean economy is recovering, but the sinking of the ferry has emerged as a risk factor threatening to crimp domestic demand, making policymakers cautious.

"As there is a growing chance that domestic demand may slow in the second quarter, there might be the need to check the growth path for the third quarter," said Lee Jae-hyoung, an analyst at Tong Yang Securities Co. "Given the Korean currency's strength and low inflation, the BOK is not likely to hike the key rate in a pre-emptive manner."

The decision came amid growing concerns that the deadly sinking of the Sewol is feared to sap consumer spending, which analysts fear could slow economic growth.

The 6,825-ton Sewol sank on April 16, with hundreds of high school students on a field trip aboard. More than 270 people have been confirmed dead, with 34 still missing. A number of industries are seeing slumps as people saddened by the accident are shunning spending.

Earlier in the day, the government said it will spend an additional 7.8 trillion won (US$7.6 billion) in the first half in a bid to support weakening domestic demand in the wake of the ferry sinking.

It said that it will provide low-interest loans to businesses in the tourism, transportation and lodging sectors, which are hard hit due to massive contract cancellations and a sharp drop in demand.

The Korean won's gain to the U.S. dollar could also complicate policymakers' efforts to gauge the timing of a possible rate increase, analysts say. The won's strength makes prices of Korean goods more expensive in overseas markets, compared with their rivals.

The won rose to the highest level in nearly six years against the greenback on Wednesday as the dollar remained weak against major currencies.

The Korean economy is on a moderate recovery path on the back of robust exports and improvement in domestic demand.

The BOK earlier forecast that the Korean economy will grow 4 percent this year following a 3 percent advance last year.

Despite signs of economic recovery, Korea's inflationary pressure still remained tame. The country's consumer prices grew 1.5 percent in April from a year earlier, up from a 1.3 percent on-year gain in March, but they ran below the BOK's 2.5 percent to 3.5 percent inflation target band for the 23rd straight month in April.

Experts said that the BOK is not likely to be in a hurry to raise the policy rate as the recovery pace could be eased due to a possible slowdown in domestic demand.

Eight out of 13 analysts forecast that the BOK may freeze the key rate until the end of this year while four argued for a rate hike this year in a poll surveyed by Yonhap Infomax, the financial news arm of Yonhap News Agency.

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http://www.globalpost.com/dispatch/news/yonhap-news-agency/140509/bok-freezes-key-rate-12th-straight-month-may-0