South Korea’s central bank yesterday kept its key interest rate unchanged at 3.25 percent for a fifth straight month, rejecting any increase amid fresh fears over Europe’s debt crisis and easing inflation.
The Bank of Korea tipped a moderate recovery for the global economy.
“However, downside risks to growth are seen as high, given Europe’s sovereign debt crisis, sluggish growth of major economies and a possible continuation of global market jitters,” it said in a statement.
The slowdown in Europe and the US is taking its toll on South Korea’s export-driven economy. GDP grew 0.7 percent quarter-on-quarter in July-September, slowing from 0.9 percent in the preceding three months.
Manufacturing activity contracted for a third straight month last month, while export growth was at a two-year low.
The annual inflation rate, meanwhile, was 3.9 percent last month, falling below the bank’s upper target of 4 percent for the first time this year.
Central bank Governor Kim Choong-soo has said the economy would likely grow in the low 4 percent range this year and next, missing the bank’s forecasts of 4.3 percent and 4.6 percent respectively.
Kim told a press conference the bank would be able to raise rates when inflation expectations show signs of anchoring and global financial markets stabilize.
“It is not proper to go in a direction of [policy normalization] without taking into account external economic conditions,” Kim said.
The freeze decision was unanimous and policymakers did not discuss a rate cut at their meeting, he said.
Barring a severe external shock, a rate cut appeared out of the question as long as inflation expectations remain elevated, HSBC Global Research said in a commentary.
It said South Korea’s economic conditions remain firm despite global financial uncertainty.
“For now, growth is not, and should not be, the Bank of Korea’s primary concern. The focus must remain on anchoring inflation expectations,” HSBC Global Research said.
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