The Bank of Korea's monetary policy board on Thursday kept interest rates unchanged at 3.00 percent, in line with expectations.
The central bank had surprised analysts last month with a 25-basis point cut after 12 straight meetings with no change.
Most analysts called another possible rate cut highly unlikely - particularly since inflation was up just 1.5 percent on year in July for the lowest reading since May 2000. The headline figure was below expectations for 1.9 percent and down sharply from 2.2 percent in June.
Inflation also slipped below the central bank's target range of 2 to 4 percent last month. In addition, the South Korean government has trimmed its inflation forecast for 2012 from 3.2 percent to 2.8 percent.
On month, overall inflation was down 0.2 percent versus forecasts for an increase of 0.2 percent after easing 0.1 percent in June.
"Consumer price inflation came in low at 1.5 percent in July, owing chiefly to the ongoing stable trend of international oil prices and to favorable weather conditions, and core inflation also posted a significantly low figure," the bank said. "The committee forecasts that inflation will remain at a low level for the time being, despite for instance pressures to hike public utility fees and the instability of international grain prices. As for housing prices, those in Seoul and its surrounding areas declined at a faster pace and their uptrend in the rest of the country slowed."
Some analysts felt there was an outside chance for another rate cut, in light of the apparently slowing recovery of the global economy - especially in Europe.
"The committee considers the economic recovery in the U.S. to have weakened somewhat and the sluggishness of economic activities in the euro area to have deepened," the bank said. "Growth has also continued to slow in emerging market countries, due mostly to the impact of the economic slumps in advanced countries. The committee expects the pace of global economic recovery to be very moderate going forward as well, with the uncertainties surrounding the euro area fiscal crisis and the international financial markets persisting.
Recent economic data also provided some support for a rate cut as South Korea's exports declined sharply in July, adding to signs that the economy is losing momentum as the European debt crisis cripples external demand.
Exports declined 8.8 percent year-on-year to $44.6 billion in July. The rate of decline was sharper than a 3.7 percent fall expected by economists.
Imports fell 5.5 percent compared to expectations for a 2.4 percent drop. The trade surplus narrowed to $2.7 billion in July from $4.9 billion in the previous month. Economists expected a surplus of $3.8 billion.
Last month, the Bank of Korea slashed the gross domestic product growth forecast for 2012 to 3 percent from April's forecast of 3.5 percent. In 2013, growth is seen at 3.8 percent compared to 4.2 percent projected earlier.
"Looking ahead, the committee, while closely monitoring external risk factors and the consequent changes in financial and economic conditions at home and abroad, and also continuing its efforts to lower inflation expectations, will conduct monetary policy so as to stabilize consumer price inflation at the inflation target over a medium-term horizon amid continuing sound growth of the economy," the bank said.
by RTT Staff Writer
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