S. Korea keeps key interest rate unchanged

South Korea's central bank Thursday kept the key interest rate unchanged for the second straight month as global economic uncertainties overwhelmed inflation woes. The Bank of Korea (BOK) held steady the benchmark seven-day repo rate, the rate at which the central bank lends to commercial banks, at 3.25 percent for August. "In the coming months, the Korean economy appears on track for steady growth," it said in a statement. "However, the downside risk to growth is likely to increase due mostly to the momentum of recoveries in the US and other major countries slowing, and to signs of sovereign debt problems in the euro area spreading," it said. On a year-on-year basis, most demand and production indicators, apart from construction investment, maintained upward trends. "Although international commodity prices are seen to show downward movements, the high rising trend of consumer prices is forecast to persist owing chiefly to the rise in prices of agricultural products and demand side pressures," the bank said. Analysts said fears of a US economic downturn and Europe's debt woes prevented the central bank from hiking the rate despite this mounting inflationary pressure. Consumer prices rose 4.7 percent in July from a year earlier, quickening from 4.4 percent growth in June. "Last week's US credit rating downgrade and jitters in global financial markets seemed to warrant a rate freeze this month," Ma Ju-ok, an economist at Kiwoom Securities Co, said before the decision. "It may be difficult for the key rate to reach beyond 3.5 percent by year-end," he told Yonhap news agency. Yum Sang-Hoon, an analyst at SK Securities Co., said global economic jitters warranted a rate freeze. "If this situation is prolonged, consumer spending will slow and commodity prices could fall. Then policymakers' focus will be placed more on the economy than inflation," he said, adding no rate change is expected for the remainder of this year. Shin Dong-Jun, a fixed-income analyst at Dongbu Securities Co, said growing economic uncertainties are raising downside risks. "An economic slowdown and a fall in oil prices would ease inflationary pressure, so the BOK is likely to freeze the key rate through the end of this year," Shin said.