Bank of Korea retains key rate for July

South Korea's central bank on Friday froze its key interest rate for July in an apparent bid to maintain the nation's economic growth amid tame inflationary pressure.

The Bank of Korea's seven policymakers retained the July target for the call rate, or interest rate on overnight inter-bank loans, at 4.25 percent after boosting the rate by 0.25 percentage point a month earlier.

The freeze is in line with analyst expectations. According to a poll by Yonhap Infomax, the financial news arm of Yonhap News Agency, 13 out of 15 economists surveyed predicted the bank would freeze the rate.

"Construction investment remains in a slump, while exports are exhibiting resilient double-digit growth along with steady increases in private spending and facilities investment," said Bank of Korea Gov. Lee Seong-tae after the rate session.

Both consumer and core inflation remain stable, but an economic recovery since the second quarter and sharp rises in global oil prices will add to upward pressure on consumer prices, he said.

The move comes as many private economists voiced concern over the pace of growth in the second-half for Asia's fourth-largest economy, arguing that the 2006 growth may fall below the government expectation of above 5 percent growth due to relatively weak consumer spending.

Samsung Economic Research Institute, the nation's leading private think tank, said in May it believes South Korea's economy will expand 4.8 percent this year, while Hyundai Research Institute in June predicted 4.5 percent growth. LG Economic Research Institute said in April it believed the economy would grow 4.7 percent.

Many government economists, however, hold different views.

The Finance Ministry said on Thursday that South Korea's economic growth would top 5 percent this year, but predicted economic growth to slow to 4.5 percent in the second half. In order to consolidate the economic recovery, the ministry plans to implement macro-economic policies in a "flexible" way during the remainder of the year, it said.

Two days earlier, the Bank of Korea also retained its 5 percent growth prediction for 2006, while cutting the second-half growth rate by 0.2 percentage point to 4.4 percent, citing rising oil prices. The pace of growth is expected to remain steady until 2007, meaning the 2007 growth rate would be between 4.5 and 5 percent.

Consumer spending is expected to accelerate on-year gains to 4.4 percent for 2006, up from 3.2 percent in 2005, according to the finance ministry and the central bank.

A series of North Korean missile tests since Wednesday also dissuaded the bank from raising the rate, the central bank governor said.

"The missile tests have not had a big impact on the economy for the last two or three days, but the bank thought it would be better to freeze the rate and see how things unfold," he said.

North Korea has fired seven missiles in tests since Wednesday, including a long-range Taepodong which is believed could be capable of striking the U.S. west coast. Reports out of Japan citing reconnaissance sources said the communist regime appears to be preparing for another Taepodong launch. The earlier one is believed to have failed shortly after it was fired.

Inflation remains relatively stable, giving the bank more room for a rate freeze, the experts said. In June, South Korea's consumer prices fell 0.2 percent from the previous month, while core consumer price inflation of 2.2 percent fell below the bank's target of 2.5 percent-3.5 percent this year, according to government data earlier in the month.

Private economists surveyed by Yonhap Infomax, however, said the bank is still on the path toward credit tightening as rising oil prices may add to uncertainties over South Korea's economy, foreshadowing another rate hike during the third quarter.

SEOUL, July 7 (Yonhap News)