ROK freezes key interest rate at 3%

SEOUL - Bank of Korea (BOK), South Korea's central bank, froze its benchmark interest rate at 3 percent on Thursday following the unexpected rate cut in the previous month as it cautioned against the back-to-back rate cut despite weaker growth and low headline inflation.

Governor Kim Choong-soo and the monetary policy board members decided to leave the 7-day repo rate untouched at 3 percent at the August rate-setting meeting. The decision was roughly in line with market expectations as most experts predicted the rate freeze, citing the BOK's cautious stance toward further rate cut.

Market watchers expected the BOK to lower the policy rate further within this year considering the central bank's switch to a monetary easing stance amid weaker growth and low headline inflation, but they pointed out that the BOK may want to keep its power dry until central banks in the United States and Europe eases.

"We believe the BOK will lower the policy rate only once in September. The central bank will be in no hurry to cut the benchmark interest rate until major economies implement policy actions," said Yoon Yeo-sam, a senior fixed-income strategist at Daewoo Securities in Seoul who predicted the BOK's July rate cut.

Mounting expectations for the BOK's further rate cut were based on downbeat economic indicators at home. Industrial activity and trade data for June and July worsened amid the surprisingly low headline inflation, leaving more room for the BOK's further easing to bolster the economy.

Output in the mining and manufacturing sectors reduced 0.4 percent in June from a month earlier, with retail sales, facility investment and construction all marking an on-month contraction in June. Both exports and imports cooled sharply in July, confirming the ongoing slowdown in economic growth.

"Weak June and July activity data raises the probability of continued weakness in the third-quarter GDP growth after an already weak growth for the second quarter. We downgrade our GDP growth forecasts for 2012 from 3.0 percent to 2.6 percent," said Oh Suk-tae, an economist at Standard Chartered in Seoul. South Korea's GDP for the second quarter grew 0.4 percent on an on- quarter basis, or 2.4 percent on an on-year basis, the slowest since the 2008 global financial crisis.

Headline inflation eased sharply. The country's consumer price inflation fell to 1.5 percent in July, the lowest since May 2000. Despite concerns over surging grain prices caused by severe drought globally, the decline in fresh food and oil product prices dragged down the consumer prices.

Global economic outlook also showed gloomy picture. The US GDP expanded at an annual rate of 1.5 percent in the second quarter, down from a revised 2 percent gain the previous three months. China's second-quarter GDP growth slowed to 7.6 percent, the lowest since the first quarter of 2009.