South Korea's central bank left the key interest rate unchanged for the third straight month on Thursday in the face of the slowing global economy and the local currency's sharp gain to the dollar.
Bank of Korea (BOK) Gov. Kim Choong-soo and his fellow policymakers froze the benchmark seven-day repo rate, dubbed the base rate, at 2.25 percent.
The decision is not in line with a median forecast by Yonhap Infomax, the financial news arm of Yonhap News Agency. Only three out of 14 experts predicted a rate freeze.
"Industrial output numbers and export growth have shown signs of easing. And the global trend of easing monetary policy stances has strengthened, as the cases of Japan's rate cut and Australia's rate freeze indicated," Yoon Yeo-sam, a fixed-income analyst at Daewoo Securities Co. said before the decision.
Last month, the BOK unexpectedly froze the rate for the second month in a row, inviting criticism from market players that the central bank had given a muddled policy signal. Analysts said this month's rate freeze seemed to come amid concerns that a rate hike would add more upward pressure to the already-strong local currency.
South Korea's industrial output grew 17.1 percent in August from a year earlier, the 14th straight month of on-year expansion. But it fell 1 percent in August from July, marking the first on-month decline in 10 months.
As the global economy continues to falter, major advanced economies have embarked on further monetary easing or held fire on additional rate increases.
The Bank of Japan last week cut its overnight rate target to near zero and made pledges for asset purchases worth 5 trillion yen (US$ 60 billion).
Theoretically, a widening rate differential with other countries invites more foreign capital inflows in search of higher returns and gives strength to the currency.
The Korean currency has sharply gained ground to the dollar amid efforts by major economies to weaken their currencies and the growing prospects that the U.S. Federal Reserve is set to resume additional quantitative easing.
Amid robust exports and sustained inflows of foreign stock and bond funds, the Korean unit has risen about 4 percent per the dollar so far this year. In September alone, the won gained more than 5 percent against the dollar.
But South Korea is facing mounting inflation risks as the economic recovery and rising raw material costs are putting upward pressure on the consumer prices.
The country's consumer prices shot up 3.6 percent on-year in September as vegetable prices surged due to bad weather, deviating from the median point of 3 percent for the central bank's inflation target.
BOK Gov. Kim said earlier that the consumer inflation rate will likely surpass 3 percent from the fourth quarter as demand-pull inflationary pressure is expected to increase.
Finance Minister Yoon Jeung-hyun said Tuesday that the government is ready to take action to curb inflationary pressure as a spike in consumer prices is feared to hurt low- and middle-income families.
Experts said as the BOK stood pat on the rate, there may be no hike within the rest of the year, given Kim's remarks that the policy normalization process would be modest and gradual.
Linkback:
https://tubagbohol.mikeligalig.com/index.php?topic=33245.0
