S.Korea freezes key rate due to global uncertainty

South Korea's central bank kept the key interest rate unchanged for the third straight month, as gloomier world economic prospects outweighed concerns about rising inflation. The Bank of Korea on Thursday held the benchmark seven-day repo rate steady at 3.25 percent for September, two days after Australia left interest rates on hold for the same reason. The Korean decision was widely predicted. Experts said fears of a possible US double-dip recession and Europe's sovereign debt woes would prompt a rate freeze, even though inflation hit a three-year high of 5.3 percent in August. The central bank said uncertainty about the growth path of the country's export-dominated economy had intensified. While emerging-market economies had performed favourably, "the recoveries in major advanced economies including the US have exhibited signs of further weakening," it said in a statement. "Inflation stayed at a high level, but as Korea is highly dependent on external economic conditions, I think that it is proper to closely take into account such factors," said bank governor Kim Choong-Soo. "If external conditions continue to remain unstable, we cannot raise the rate." The bank predicted the rising trend of consumer prices would persist because of the higher cost of oil and demand-side pressure. But it said it expects the pace of inflation to slow "somewhat" as food prices fall. However, Kim said it would be "very challenging" for the central bank to meet its full-year inflation target of 4 percent." South Korea's economy has shown signs of slowing. Industrial production grew 3.8 percent year-on-year in July, from a 6.5 percent rise in June. The final second-quarter GDP growth figure released this week showed a 0.9 percent expansion quarter-on-quarter, decelerating from 1.3 percent in January-March. Moody's Analytics said monetary tightening was unlikely this year until the economic outlook became clearer. "This is a prudent course because the balance of risks has tilted to the downside," it said in a commentary. Weakness in the United States and Europe would damage Korea's exports as would China's tightening, it said. In addition, "the bump in processed fuel exports to Japan will fade as Japan recovers (from the after-effects of the March quake and tsunami) and its generation capacity is restored." Other analysts were divided on the possibility of an impending rate rise. "High inflation pressure means that the central bank's tightening cycle remains intact. One rate hike is expected in the fourth quarter," Yoon Yeo-Sam, an analyst at Daewoo Securities, told Yonhap news agency. But Ju Lee-Hwan, of Eugene Investment and Securities, said food prices may fall after next week's thanksgiving holiday, allowing for a rate freeze for the rest of the year. Moody's Analytics said the central bank has some flexibility on inflation thanks to the peaking of global commodity prices. "Food inflation, which spiked partly because of floods in Seoul in July, will also moderate," it forecast.