Central bank freezes key rate

The central bank kept its policy interest rate unchanged at 1.25 percent Thursday, maintaining the record low rate for eight straight months.

The Bank of Korea’s (BOK) Monetary Policy Board members unanimously decided to keep the rate at the present level. The board has not changed the base rate since cutting it to its lowest level last July.

The board showed a more pessimistic view of the domestic economy than it did a month earlier.

“(Korea’s) economic growth is expected to sustain a moderate pace in the mid-2 percent range going forward, but the uncertainties surrounding the growth path are judged to be considerable,” the board said.

“Factors such as the sustainability of the global economic recovery, the intensity of protectionist trade policies of the new U.S. government and the future directions of domestic economic sentiment remain as potential uncertainties.”

Trapped in this dilemma, the BOK was widely expected not to move the rate. Sluggish economic sentiment and snowballing household debt are putting pressure on the central bank to cut the rate. But at the same time, a looming U.S. rate hike and consumer price inflation are pushing the BOK to raise the rate.

The country’s household debt was 1,334 trillion won ($1,180 billion) at the end of last year. This accounts for more than 90 percent of gross domestic product.

A cut in the key rate would help alleviate debt holders’ burdens, but a lower policy rate compared with that of the U.S. could cause a capital flight.