South Korea's central bank left the key interest rate unchanged for the second straight month on Thursday after a surprise rate hike in July due to concerns about the faltering global recovery.
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.
The decision is not in line with a median forecast by Yonhap Infomax, the financial news arm of Yonhap News Agency, with only four analysts at 10 financial institutions predicting the rate freeze this month.
"Concerns about the global recovery have pushed down yields for U.S. Treasuries and the slumping local property market also seemed to make it difficult for the central bank to conduct a rate hike," said Lee Sung-kwon, an economist at Shinhan Investment Corp.
In July, the BOK conducted the first rate increase since the onset of the global financial turmoil by lifting the rate to 2.25 percent from a record low of 2 percent, a move to preemptively
curb inflationary pressure.
But South Korea's export-driven economy cannot be free from signs of the economic slowdown in the U.S. and China, making policymakers take a cautious note against the global growth outlook.
The finance ministry said on Tuesday that the South Korean economy is facing "greater" downside risks, citing economic uncertainties abroad and possible fluctuations in raw material prices, despite its better-than-expected recovery.
But the need to normalize the low rate is increasing as the economic recovery and spikes in agricultural product prices are widely expected to put upward pressure on inflation. The central
bank said consumer prices are likely to top 3 percent from the fourth quarter, the median point of the bank's inflation target for 2010-2012.
The International Monetary Fund (IMF) last week upgraded its 2010 growth outlook for the Korean economy to 6.1 percent from 5.75 percent. The BOK has predicted 5.9 percent.
The IMF said a key rate of near 4 percent would be a neutral level for South Korea, which could boost employment and activity without sparking inflation, calling for well-calibrated
normalization of the accommodative policy stance.
Gov. Kim has said that despite the recent rate hike, the current monetary policy stance is still viewed as "highly accommodative," hinting that an additional rate increase is in the offing.