BOK freezes key rate for 12th straight month in May

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 weaken consumer spending.

Bank of Korea (BOK) Gov. Lee Ju-yeol and his five fellow policymakers unanimously 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, which claimed the lives of more than 270 people aboard.

Gov. Lee said that it cannot be excluded that the fallout of the ferry disaster on domestic demand may persist throughout the second quarter.

"Consumer sentiment was sharply weakened due to the ferry sinking, raising concerns that the recovery of domestic demand could be curbed," the governor told a press conference.

But touching on the direction of the monetary policy, Gov. Lee noted that the BOK's next move would be a rate hike, though he refrained from commenting on the timing.

"The level of 2.5 percent is seen as being supportive of the economic growth. Given the trend of economic movements, the direction of the rate policy will be tightening," Lee noted.

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.

The 6,825-ton Sewol sank on April 16, with hundreds of high school students on a field trip aboard. A number of industries are seeing slumps as people saddened by the accident are shunning spending.

"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."

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 local currency rose to as high as 1,020.90 per the greenback at one point, the highest in nearly six years, but it reversed the gain and fell 0.18 percent to end at 1,024.40 won following foreign exchange authorities' verbal intervention.

"The won's gain has negative effects on exports, but it can prop up domestic demand by raising the real purchasing power," Gov. Lee said.

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.

Kwon Young-sun, an economist at Nomura in Hong Kong, reiterated in a report his call for a rate hike in December, but also saw a risk that this could be pushed back if private spending continues to slow in the second half.

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