Benchmark Interest Rate Frozen for 3rd Straight Month

The Bank of Korea in a meeting of its Monetary Policy Committee yesterday froze the nation’s key rate at two percent for the third straight month.

Central bank Governor Lee Seong-tae told reporters, “The Bank of Korea decided to freeze Korea’s key rate since the economy drastically contracted in the final quarter last year and early this year. But the pace of the economic slump has slowed down over the past few months. Given economic conditions at home and abroad, Korea seems to have avoided the worst-case scenario.”

The domestic financial market interpreted Lee’s statement as meaning the central bank will take a closer look at economic developments, with Korea’s economy highly unlikely to take a sharp downturn but showing no clear signs of economic recovery.

Exports have seen a rebound. In March, export volume dropped 22 percent year-on-year, but fell 19 percent in April. The manufacturing production index declined 11.2 percent in April, lower than the fall of 19.2 percent in January and February. Similarly, the coincident composite index rose in March for the first time since January last year, and leading economic indexes have grown for three consecutive months.

Governor Lee, however, stopped short of saying the economy has bottomed out. “It`s hard to expect consumption will grow significantly since employment has fallen and wages have hardly increased. Korea’s economy will neither experience recession nor recover significantly. Such a complicated condition will be prolonged for a while,” he said.

On the controversy over excess liquidity, Lee said, “Short-term liquidity has rapidly grown recently, but it remains to be seen whether rapidly growing short-term liquidity will affect the financial sector and the real economy. It`s also premature to determine whether the Korean economy has excess liquidity or discuss how to reduce it.”

On the surging value of the won versus the U.S. dollar, Lee said the central bank will not intervene in the market. “Since price variables such as the foreign exchange rate reflects a variety of phenomena, we should not evaluate the foreign exchange rate from the perspective of exports and imports. We need to consider the impact of the foreign exchange rate on a variety of factors, such as consumer prices.”

jaeyuna@donga.com