Key Interest Rate Frozen Amid Positive Signs

The Bank of Korea yesterday froze its benchmark interest rate for the second straight month at two percent at its monthly Monetary Policy Committee meeting.

The central bank had made six cuts between October last year and February this year, as the rate fell from 5.25 percent to a record-low two percent over that period.

The bank cited a wait-and-see attitude for the time being for the freeze given that the economic slowdown has shown signs of weakening, and partly to prepare for a protracted recession.

“The pace of economic slowdown was very fast until the end of last year, but has greatly slowed in the last couple of months,” bank governor Lee Seong-tae told reporters.

“As the government’s public investment projects gain momentum and the private sector’s inventory adjustment is conducted swiftly, the lag in the manufacturing and service industries have begun to ease up temporarily.”

The Korea National Statistical Office said production in manufacturing in February increased 6.8 percent and that in the service sector rose 1.2 percent from January. Leading economic indicators stopped 14 straight months of negative growth and turned around.

The recent stability in the financial market as shown by the rise in stock prices and the rebounding won contributed to the bank`s decision to freeze rates.

“We might not see the economy hit bottom in the first half of this year,” Lee said. “The government could use strong economic stimulus policies but the global economy might not turn around over the short period of time as consumption and investment are severely dampened.”

The pace of economic slowdown has weakened, but he repeated that the economic crisis might continue for a while.

The bank chief, however, hinted at further rate cuts down the road, denying signs of the feared “liquidity trap,” or a situation where investment and consumption stay sluggish despite lower interest rates.

jaeyuna@donga.com