S. Korea freezes key interest rate at 3%

Wednesday, 13 April 2011 00:00 - - {{hitsCtrl.values.hits}}

SEOUL, (AFP) -South Korea’s central bank froze its key interest rate Tuesday as it assessed potential global economic threats, including the impact of Japan’s devastating earthquake and tsunami.

Bank of Korea governor Kim Choong-Soo and fellow policymakers kept the benchmark seven-day repo rate unchanged at 3 percent for April, following a 25 basis point increase in March to curb rising inflation.

Analysts said the bank needs time to assess the impact of March’s increase, and the rise of the won against the dollar would meanwhile ease imported inflation.

But the bank said it expects consumer prices to keep going up, due mainly to demand arising from an economic upswing and higher oil prices. Analysts tipped a hike in the base rate as soon as May.

In a statement the bank said the domestic economy appears on track for solid growth in coming months thanks partly to strong exports, but risks remain.

“The run-up in oil prices associated with the political unrest in the Middle East and North Africa, the aftermath of the Japan earthquake and the fiscal problems of European countries will act as major downside risk factors,” it said.

Annual inflation hit a 29-month high of 4.7 percent in March and the government has described rising prices as its top economic challenge.

As part of a series of counter-measures, import tariffs on chicken and flour have been temporarily removed and refiners have been prodded to cut petrol and diesel prices.

The bank said it would conduct future monetary policy with a greater emphasis on ensuring a firm basis for price stability, suggesting another rate rise soon.

“The strengthening won is doing some of the heavy lifting in terms of policy tightening, but the central bank will not want to rely too much on the inherently volatile currency markets,” said Sukhy Ubhi, Asia economist with Capital Economics.

“We expect the base rate to be hiked in May,” Ubhi said in an emailed commentary.