SEOUL — South Korea’s central bank Friday froze its key interest rate for the seventh straight month, amid concern in the export-dependent nation at Europe’s debt crisis and a global economic slowdown. The rate has stayed unchanged at 3.25 percent since a 25-basis-point rise in June last year, despite persistent price pressures. Inflation remained above the central bank’s target range of 2-4 percent for a second straight month in December, at 4.2 percent. In his New Year address, President Lee Myung-Bak stressed that curbing price rises was a priority. The Bank of Korea (BOK) said it expects a “very moderate” pace of global economic recovery. Risks to growth were becoming larger, due mainly to Europe’s sovereign debt crisis and a possible downturn in major economies.
It said in a statement that South Korea’s growth would return only gradually to its long-term trend level, with external risk factors still weighing on the economy.
The bank said it expects the pace of decline in inflation to be moderate given continuing high expectations. Upside risks to inflation had increased due to heightened geopolitical risks in the Middle East, it added in an apparent reference to tensions over Iran’s suspected nuclear weapons program.
Bank governor Kim Choong-Soo said he does not expect the economy to contract but forecast growth in the fourth quarter of 2011 would be lower than the forecast 1 percent quarter-on-quarter rise and a 4 percent year-on-year gain.
Analysts said high inflation dampened expectations that the central bank may resume monetary easing to cushion the impact of Europe’s debt crisis.
But HSBC Global Research tipped a 25 basis points cut by the end of the first quarter. While the BOK kept rates unchanged for the seventh month in a row, “its stance has become more doveish,” it said in a commentary.
“The central bank now projects economic activity to drop below long term trend for some time. High inflation expectations are the last man standing. Once they come down, the Bank of Korea can comfortably ease policy rates.”