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South Korea's central bank froze the key interest rate on Thursday in a bid to gauge the impact of its surprise rate cut in July on the local economy amid the protracted eurozone debt crisis.
As widely expected, Bank of Korea (BOK) Gov. Kim Choong-soo and his fellow policymakers held the benchmark 7-day repo rate steady at 3 percent for August. The move followed the BOK's quarter-percentage point rate reduction in July, the first cut in more than three years.
Analysts said the slowing growth and easing inflationary pressure are likely to give the BOK room to cut the rate further down the road.
The decision, which was unanimous, came as exports, one of the main growth drivers of the Korean economy, faltered and annual inflation growth eased to a 12-year low in July, running below the BOK's inflation target band of 2-4 percent.
The BOK chief presented the bleak outlook for the growth, saying that downside risks to growth predominate, beset by the eurozone debt turmoil and economic slowdowns in emerging countries.
"Korea's economic growth decelerated due to lackluster exports and domestic demand...The pace of the global recovery is expected to be very moderate," Gov. Kim told a press conference.
Kim played down recently-raised concerns about deflation.
"Inflation expectations are weakening," Kim said. "But Korea is not facing a situation to worry about deflation risks."
As the growth of consumer inflation eased to the 1-percent range, some experts warned that South Korea may face deflation in asset prices, given households' high indebtedness and the tepid property market.
With regard to inflation, the BOK said that consumer inflation is expected to remain low for the time being despite potential upward risks, including hikes in public utility fees and unstable grain prices.
"If the BOK had cut the rate for a second straight month, economic agents would have cemented their bleak assessment of the Korean economy, which would have been bad enough to warrant a back-to-back cut," said Kong Dong-rak, a fixed-income analyst at Taurus Investment & Securities Co.
"The rate freeze came as the BOK can now wait and see the impact of monetary easing steps to be taken by the U.S. and Europe before deciding on taking a second rate cut."
Following the decision, bond futures sharply declined on investors' profit taking and the local currency appreciated against the dollar. The returns on treasury bonds have been on the decline on growing expectations for a rate cut.
The protracted eurozone debt crisis and China's slowing economy are blurring the prospects of the Korean economy, which grew a mere
0.4 percent on-quarter in the second quarter.
South Korea's exports dropped 8.8 percent in July from a year earlier, the sharpest decline since September 2009. Imports fell for the fifth straight month as domestic demand is weakening due to the economic slowdown.
The BOK's 2012 growth outlook was lowered to 3 percent from 3.5 percent. Finance Minister Bahk Jae-wan and the BOK chief earlier hinted that the full-year growth may reach below 3 percent.
Central banks in the eurozone and the U.S. did not take quantitative easing steps this month, but expectations are growing that they will do so next month to help the global economy get back on track.
Amid the slowing economy, the country's headline inflation grew
1.5 percent on-year in July, the slowest pace in 12 years. The BOK's 2012 inflation projection stands at 2.7 percent and the bank aims to keep its median inflation target at 3 percent for 2010-2012.
Rising global grain prices are raising fears that the risks of "agflation" may grip South Korea, which heavily imports grains and other agricultural products.
The BOK said that recent gains in grain prices will likely serve as upward pressure on consumer prices after the end of this year, but their impacts on inflation would not be large.
Analysts said once the BOK shifted its monetary stance into a soft bias last month, a rate cut will be just a matter of timing, not a matter of choice.
"A quarter-percentage point rate cut is expected in September or October, given the need to shore up sluggish domestic demand," said Hong Jung-hye, a fixed-income analyst at Shinyoung Securities Co.
The BOK slashed the key rate by 3.25 percentage points to a record low of 2 percent between October 2008 and February 2009 to fight global financial turmoil. The bank raised it by five steps between July 2010 and June 2011 to curb inflationary pressure. (Yonhap News)
As widely expected, Bank of Korea (BOK) Gov. Kim Choong-soo and his fellow policymakers held the benchmark 7-day repo rate steady at 3 percent for August. The move followed the BOK's quarter-percentage point rate reduction in July, the first cut in more than three years.
Analysts said the slowing growth and easing inflationary pressure are likely to give the BOK room to cut the rate further down the road.
The decision, which was unanimous, came as exports, one of the main growth drivers of the Korean economy, faltered and annual inflation growth eased to a 12-year low in July, running below the BOK's inflation target band of 2-4 percent.
The BOK chief presented the bleak outlook for the growth, saying that downside risks to growth predominate, beset by the eurozone debt turmoil and economic slowdowns in emerging countries.
"Korea's economic growth decelerated due to lackluster exports and domestic demand...The pace of the global recovery is expected to be very moderate," Gov. Kim told a press conference.
Kim played down recently-raised concerns about deflation.
"Inflation expectations are weakening," Kim said. "But Korea is not facing a situation to worry about deflation risks."
As the growth of consumer inflation eased to the 1-percent range, some experts warned that South Korea may face deflation in asset prices, given households' high indebtedness and the tepid property market.
With regard to inflation, the BOK said that consumer inflation is expected to remain low for the time being despite potential upward risks, including hikes in public utility fees and unstable grain prices.
"If the BOK had cut the rate for a second straight month, economic agents would have cemented their bleak assessment of the Korean economy, which would have been bad enough to warrant a back-to-back cut," said Kong Dong-rak, a fixed-income analyst at Taurus Investment & Securities Co.
"The rate freeze came as the BOK can now wait and see the impact of monetary easing steps to be taken by the U.S. and Europe before deciding on taking a second rate cut."
Following the decision, bond futures sharply declined on investors' profit taking and the local currency appreciated against the dollar. The returns on treasury bonds have been on the decline on growing expectations for a rate cut.
The protracted eurozone debt crisis and China's slowing economy are blurring the prospects of the Korean economy, which grew a mere
0.4 percent on-quarter in the second quarter.
South Korea's exports dropped 8.8 percent in July from a year earlier, the sharpest decline since September 2009. Imports fell for the fifth straight month as domestic demand is weakening due to the economic slowdown.
The BOK's 2012 growth outlook was lowered to 3 percent from 3.5 percent. Finance Minister Bahk Jae-wan and the BOK chief earlier hinted that the full-year growth may reach below 3 percent.
Central banks in the eurozone and the U.S. did not take quantitative easing steps this month, but expectations are growing that they will do so next month to help the global economy get back on track.
Amid the slowing economy, the country's headline inflation grew
1.5 percent on-year in July, the slowest pace in 12 years. The BOK's 2012 inflation projection stands at 2.7 percent and the bank aims to keep its median inflation target at 3 percent for 2010-2012.
Rising global grain prices are raising fears that the risks of "agflation" may grip South Korea, which heavily imports grains and other agricultural products.
The BOK said that recent gains in grain prices will likely serve as upward pressure on consumer prices after the end of this year, but their impacts on inflation would not be large.
Analysts said once the BOK shifted its monetary stance into a soft bias last month, a rate cut will be just a matter of timing, not a matter of choice.
"A quarter-percentage point rate cut is expected in September or October, given the need to shore up sluggish domestic demand," said Hong Jung-hye, a fixed-income analyst at Shinyoung Securities Co.
The BOK slashed the key rate by 3.25 percentage points to a record low of 2 percent between October 2008 and February 2009 to fight global financial turmoil. The bank raised it by five steps between July 2010 and June 2011 to curb inflationary pressure. (Yonhap News)
