Korea’s central bank board to decide key rate on Friday


In recent months, the key debate concerning the interest rate policy of the Bank of Korea revolved around when it would raise benchmark rates.

Not for Friday, when the central bank holds its policy-setting meeting amid growing worries over whether the eurozone debt crisis will spin out of control, engulfing bigger nations like Italy and dragging down the global economy.

Although analysts and economists expect the central bank to keep the rate frozen, they are now looking for any hint of a possible rate cut further down the road, perhaps in the first half of next year.

The shift in expectations came as more central banks across the world began to take preemptive measures against the worsening outlook of the global economy, sparked by the eurozone debt crisis and recession worries about the U.S. economy.

The initial move came from Turkey, whose central bank slashed the key rate by a half percentage point to 5.75 percent in August. Brazil followed suit, lowering the rate by a half percentage rate in two years in the same month for the first time.

In September, Israel joined the rate-cutting bandwagon by trimming the rate by a quarter percentage point. Indonesia jumped in with a similar move in October and Australia shifted its stance to a rate cut on Nov. 2.

The European Central Bank also surprised the market by cutting the rate by a quarter percentage point to 1.25 percent on Nov. 3, sending a positive sign to stock markets hammered by the increasingly wobbly backdrop of Greece in turmoil over its latest bailout package.

The ECB’s rate-cutting marked a dramatic turnaround as it had raised the rates twice between April and July. The cut is interpreted as also a tacit admission that the global economic downturn might be deeper than previously predicted.

The U.S. Federal Reserve Board is also expected to opt for a third round of quantitative easing in the near future, as its benchmark rates are already at a record low with little room for extra maneuvering.

For Korea, any misstep could backfire as the demand from Europe is already shrinking, a bad sign for a country that relies heavily on trade to bolster its economic growth.

Both leading and concurrent economic indicators pointed to weakening, with the manufacturer’s sentiment tumbling by the month. Exports also slowed to single-digit growth, raising a warning sign that might require the shot of a rate cut.

Complicating the matter, however, is the stubbornly high inflation rate. Although inflation dropped to 3.9 percent in October, making it into the BOK’s target band for the first time this year, it is still deemed burdensome for policymakers.

Analysts said the central bank is likely to keep its wait-and-see stance until year-end and consider loosening up the policy in the first half of next year if economic conditions deteriorate.

The BOK kept the key rates steady at 3.25 percent in October for the fourth straight month, citing greater risks to global economic growth.

By Yang Sung-jin (insight@heraldcorp.com)