Bank of Korea Governor Kim Choong-soo bangs a gavel after the central bank decided to freeze the key rate at 3.25 percent for the 12th consecutive month at its headquarters in Seoul, Friday. / Korea Times phyoto by Lee Ho-jae

By Kim Tong-hyung

Korea is falling further behind in a worldwide move to cut key rates, aimed at preempting a further economic downturn. The central bank kept its key rate at 3.25 percent Friday, marking a 12th consecutive month on hold.

The rate freeze came a day after China lowered its interest rate by 0.25 percentage point in order to minimize shocks from slowing domestic demand and the eurozone crisis. Brazil and Australia also recently lowered rates.

U.S. Federal Reserve Chairman Ben Bernanke’s warning American lawmakers that the worsening eurozone crisis threatens the U.S. economy clearly didn’t inspire any confidence here.

The BOK decision comes as the difficult quandary between subduing economic activity and inflation continues to force policymakers to sit on their hands but pressure on credit easing is mounting with the euro debt crisis sending a shudder through the global economy.

Some analysts said the BOK was always likely to follow the path taken by other central banks, noting that Asia’s fourth largest economy is growing at a slower pace amid subdued inflation.

“Inflation has gapped lower and we believe it’s dead for this year. The services economy never recovered after the global crisis and now the manufacturing sector has been hit by the export slowdown,” ING senior economist Tim Condon wrote in a research note.

“With our view that slower post-global crisis nominal GDP growth has made the new neutral BOK policy rate 3 percent, we see a compelling case for a BOK rate cut,” he added.

BOK Governor Kim Choongsoo said, however, worsening global conditions highlighted by the escalating financial crisis in Europe have been feeding arguments for lower borrowing costs.

“While the decision was unanimous, there were discussions on a variety of scenarios of how we could react to changes in the economy. However, the talks didn’t touch on whether we should raise or lower rates at some point in the future,” Kim told reporters after the monetary policy committee meeting.

“As of now, we have yet to find a particular reason that warrants a real discussion about changing our stance on the policy rate.

However, the global economy is providing some fast-changing variables now and discussions about a step-change in policy could be possible after analyzing carefully how all these factors will impact the Korean economy.” An elevation in consumer prices has led to an acute squeeze on living standards since the start of last year and government officials are concerned that the persistently high inflation expectations will make their efforts to restore price stability more difficult.

However, the triple prongs of a toxic Europe, faltering U.S. economy and the slowdown in China, which threatens to derail Korea’s fragile recovery, is dissuading rate setters from a hike. In fact, when the proverbial gun is held to their heads, most observers bet that the BOK will lower the benchmark rate first before raising it.

Korea has experienced a sharp drop in exports, which fell for the third consecutive month in May, as the worsening global crisis eats into demand for major export items like technology products and cars. This is an alarming development as consumers are unable to pick up the slack since household finances are in urgent need of refreshment.