South Korea's central bank froze the key interest rate for the third straight month on Thursday in the face of the flagging global economy and the local currency's sharp gain to the dollar.
Beating market expectations, 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.
After the central bank's monthly rate-setting session, the top central banker raised concerns that rising currency volatility would likely serve as downside risks to the growth of the South Korean economy.
"Global financial market conditions are swiftly changing ... There is a possibility that heightened currency volatility is likely to work as a downside risk," Gov. Kim said at a press conference. "External economic conditions are important for (export-dependent) countries like South Korea."
The BOK said the rate freeze decision was not unanimous, indicating that there was heated debate over whether to hike the borrowing costs amid increasing economic uncertainty and the global currency row. The central bank said it plans to reveal whether a rate decision is unanimous or not starting from today's session.
Despite the rate freeze, the Korean currency climbed to a more than five-month high of 1,110.90 to the dollar. Prices of South Korean government bonds shot up with the December treasury bond futures jumping by as much as 64 ticks at one point.
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, hurting the country's export growth.
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 shows signs of easing, 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 Australia left the interest rate unchanged.
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 5 percent per dollar so far this year. In September alone, the won gained more than 5 percent against the dollar.
But South Korea, which is facing mounting inflation risks, cannot escape some criticism that it might have lost a chance to normalize its exceptionally low rates.
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.
Gov. Kim tried to emphasize that the BOK will continue to focus on price stability, saying that the central bank would closely monitor price movement as demand-pull inflationary pressure will mount.
"The BOK's policy normalization stance is still intact," the governor said.
Experts said as the BOK stood pat on the rate that 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.
"I think it may be difficult for the BOK to raise the key rate within this year unless the global currency dispute settles down," said Lee Chul-hee, a chief economist at Tongyang Securities Investment.
But others said the BOK still opened the door for a potential rate increase within this year, considering rising inflation risks.
"Given that policymakers were split over October's rate freeze, there is room that the central bank could raise the base rate in the remainder of the year," said Lim Ji-won, an economist at JPMorgan.
"Next month's rate setting meeting will be held after Korea chairs the G-20 summit. BOK policymakers might focus on domestic factors then." The next rate session will be held on Nov. 16. - PNA
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