BOK freezes rate at 2.5 per cent

SOUTH KOREA - The Bank of Korea has kept its key base rate unchanged at 2.50 per cent for July and revised upward its domestic economic projection for this year to 2.8 per cent.

BOK Gov. Kim Choong-soo reiterated on Thursday that expectations of a modest recovery of the global economy and higher growth in Korea in the second quarter of this year than the first quarter were its main reasons for a rate freeze.

The central bank's monetary policy committee also cited Korea's negative output gap narrowing despite lower growth prospects for emerging economies this year as another reason it decided unanimously to maintain the 2.50 per cent rate for two straight months.

The BOK chief pointed out that the effects of its rate cut last May to support the government's extra fiscal spending are currently being seen in the market, leading it to boost its growth projection back to 2.8 per cent.

It initially revised down this year's growth to 2.6 per cent from 2.8 per cent last April. The Finance Ministry, meanwhile, recently changed its domestic growth projection to 2.7 per cent from 2.3 per cent.

Projections of revived private consumption and facility investment on the back of global recovery are also attributable to a rosier economic outlook.

The central bank's revised outlook included expectations of Korea returning to its traditional 4 per cent growth next year, and inflation hitting 1.7 per cent this year and 2.9 per cent next year. Its inflation target for 2013-2015 is 2.5-3.5 per cent.

Korea's stable consumer prices also justified the rate freeze this month, the BOK explained, although inflation may appear to rise in the latter half of this year due to a low base effect as a result of Korea recording low inflation in the second half of last year.

The governor warned that negative factors such as the eurozone's prolonged recession still persist that can make the Korean financial markets move unpredictably, as seen in June when US Federal Reserve Chairman Ben Bernanke said it planned to trim its monetary easing as employment improved.

The Fed chief backtracked on his previous forecast Wednesday, saying that it still needs to implement a "highly accommodative monetary policy" due to weak jobs and automatic government spending cuts.

This, along with China's capability to contain its emerging credit crunch, boosted the Korean stock market with the benchmark KOSPI closing at 1,877.60, up 2.93 per cent, on Thursday after days of volatile trading.

Governor Kim said Korea's sound macroeconomic policy operations and current account surplus have helped maintain financial stability with a smaller rise in its market interest rates compared to emerging markets over the last couple of months.