Currency dealers work in a dealing room of a bank in Seoul
The Bank of Korea Thursday announced its decision to hold the policy rate at 3 percent, even though market participants believe stimulus measures are urgently needed to reinvigorate the country's weakening economy.
Given that both domestic and global conditions have been weak over the past few months and South Korea's consumer price inflation fell to 1.2 percent in August, which is a 12-year low and below the central bank's 2 to 4 percent target range, market players had been expecting a cut in the interest rate.
Though the Bank of Korea has decided to hold the policy rate, it expects global growth will continue to disappoint. The central bank has noted that U.S. growth has lost momentum and that the euro zone economy is contracting, with weaker exports in the major economies in turn bringing slower growth in emerging Asian economies this year.
Analysts sense that despite the European Central Bank's latest policy measures, the euro zone crisis is likely to escalate once more.
Though the U.S. Fed launched a third round of quantitative easing this week, it is expected that the QE3 will have only a small impact on growth. Led by prolonged weakness in the euro zone, the global growth is expected to remain subdued not just for the remainder of 2012 but also in 2013.
According to the revised data from the BoK earlier this month, South Korea's economic growth down to 0.3 percent in the second quarter compared to previous one. The preliminary reading in July showed that South Korea's gross domestic product was up 0.4 percent in the second quarter of 2012. In the first quarter, the economy expanded 0.9 percent.
Last week, the BoK reported that South Korean manufacturing BSI Index for September was at 75. A reading below 100 means that the firms that see business conditions deteriorating outnumber those that see an improvement. Also, according to data released last month by the National Statistical Office, industrial production in South Korea saw a decline of 1.6 percent in July, down from 0.6 percent decrease in June.
In July, the central bank cut the base rate by 25 basis points to 3 percent. With South Korea's economy continuing to slow down, investors feel that the BoK will be under pressure to announce more monetary easing measures, including a further cut in the interest rate this year.
This article is copyrighted by International Business Times, the business news leader