By Kim Soo-yeon
SEOUL, Aug. 8 (Yonhap) -- South Korea's central bank froze the key interest rate for the third straight month on Thursday as Asia's fourth-largest economy is extending its trend of moderate recovery.
Bank of Korea (BOK) Gov. Kim Choong-soo and his six fellow policymakers unanimously held steady the benchmark seven-day repo rate, dubbed the base rate, at 2.5 percent, as widely expected.
In May, the BOK made the first rate cut in seven months in an effort to support the government's drive to stimulate growth. The bank slashed the rate in July and October last year.
The BOK said that the global economy is expected to sustain the moderate recovery down the road, aided by improvements in the U.S. economy, but downside risks linger such as uncertainty over the Federal Reserve's stimulus exit and China's economic slowdown.
"Global financial markets are likely to continue to see some volatility until the U.S. wraps up its exit strategy, warranting a close watch," Gov. Kim told a press conference.
The rate freeze comes as the Korean economy has gained traction, helped by fiscal and monetary stimulus. Central banks around the globe are on the divergent path in managing the monetary policy with some emerging countries tightening the policy stance on concerns over cross-border capital outflows.
The governor said that he sees a very low possibility that Korea would suffer from potential capital outflows as Korea's economic fundamentals remain sound such as the current account surplus.
"The BOK might have needed more time to gauge impacts of the latest rate cut as a set of data points to growing signs of the economic recovery," said Kong Dong-rak, a fixed-income analyst at Hanwha Investment & Securities. "The BOK is likely to stand pat on the key rate for the remainder of this year and its next move would a rate increase."
Korea's on-quarter economic growth quickened to 1.1 percent in the second quarter, the fastest gain in over two years, while its consumer inflation remained benign. The BOK last month revised up its 2013 growth forecast to 2.8 percent, and the government now expects the local economy to grow 2.7 percent this year.
The on-year growth of Korea's consumer prices picked up to 1.4 percent in July, but consumer inflation remained in the 1-percent range for the ninth straight month, running below the BOK's inflation target band of 2.5-3.5 percent.
As for inflation, the BOK said that consumer inflation is likely to remain stable for the time being, but also added that inflation growth is expected to accelerate on higher prices of agricultural products.
"The BOK is keeping a close tab on price movements to see whether consumer prices could hit the bottom of the inflation target band," Gov. Kim noted.
A long stretch of low inflation has sparked concerns about disinflation or even deflation in South Korea. The BOK recently revised down its 2013 inflation estimate to 1.7 percent.
Despite signs of the economic recovery, the Korean economy still faces downside risks.
Signs of China's slowdown are a cause for concern to Korean policymakers as the world's second-largest economy is Korea's biggest trading partner. Exports account for around 50 percent of Korea's economic growth.
Emerging countries such as Indonesia are tightening their monetary policies in a bid to curb cross-border capital outflows, sparked by Fed stimulus exit speculation. The U.S. central bank is mulling the timing of dialing back its bond-buying stimulus program, but central banks in the eurozone and Japan vowed to keep their accommodative policy stance.
Most analysts said that the BOK is likely to hold the key rate steady this year as the economic recovery is reducing the need to cut the benchmark rate while subdued inflation does not warrant an imminent rate hike.
But more experts are forecasting that the BOK's next move may be a rate hike, saying that it may come late next year. The BOK forecast Asia's fourth-largest economy will grow 4 percent in 2014.