South Korea’s central bank yesterday kept its key interest rate unchanged at 3.0 percent, defying expectations that it would take advantage of low inflation to announce an economy-boosting cut.
The Bank of Korea froze its key rate for the second month in a row, having trimmed the rate in July by 25 basis points, in its first policy easing since early 2009.
The July cut coincided with government efforts to reverse a slowdown in the South Korean economy, which has struggled with an export slump caused by a weak US economy and the prolonged eurozone debt crisis.
Market analysts had been expecting another 25 basis points on the back of government data showing inflation at a 12-year low of 1.2 percent last month and unemployment holding steady at 3.1 percent.
“I think it’s a very disappointing decision,” said Frances Cheung, a senior strategist at Credit Agricole CIB in Hong Kong.
“Given the weak domestic demand and low inflation, I can see no hurdle to stop them cutting interest rates,” Cheung said.
South Korean exports fell for the second consecutive month last month, down 6.2 percent from a year earlier to US$42.97 billion. July exports were down 8.8 percent year-on-year.
In June, South Korea revised down its economic growth forecast for this year to 3.3 percent from its earlier projection of 3.7 percent, mainly as a result of weak exports.
Earlier this week, the government announced a new US$5.2 billion stimulus package of spending and tax relief plans, which South Korean Finance Minister Bahk Jae-wan called a response to “growing concerns about our sagging economic power.”
In its statement yesterday, the central bank said it believed the stimulus package would likely “contribute to preventing any deepening of the economic slowdown.”
The bank said inflation was expected to remain below the median target of 3 percent for the time being, despite price pressures caused by a recent typhoon and unstable oil and grain prices.