Bank of Korea Freezes Interest Rate to Protect Currency

The Bank of Korea has prioritized protecting the Korean won over stabilizing prices by freezing the benchmark interest rate at 2.25 percent.

The central bank’s Monetary Policy Committee froze the rate Thursday for the third consecutive month. Though inflation is expected to exceed the bank’s target of three percent through next year, the committee froze the rate to prevent the country from falling victim to a currency war that is intensifying day after day.

In July, inflationary pressure led the bank to raise the rate 25 basis points but the freeze this month was apparently spurred by uncertainty in the global economy.

On the reason for the freeze, Bank of Korea Gov. Kim Choong-soo said, “For a country with high dependence on external trade like Korea, external factors are very important,” adding, “The currency war poses the risk of slowing down the economy.”

He apparently judged that if Korea raises the rate at a time when other countries seek to prevent their currencies from appreciating to enhance export competitiveness, interest rate gaps in and outside of Korea will widen and cause an influx of foreign capital. This will strengthen the won, leading to a decline in Korea’s export competitiveness, he said.

Kim, however, left open the possibility of raising the rate to curb inflation by saying, “The direction (for rate hikes) remains intact since inflation of around three percent will continue.”

The central bank’s surprise freeze caused the rate for the three-year government bond to dip 0.2 percentage points to close at 3.08 percent, shattering the record low of 3.24 percent set on Dec. 7, 2004. That for the five-year government bond also fell 0.19 percentage points to a record low 3.45 percent.

Despite the freeze, however, the won rose 9.8 points against the dollar to close at 1,110.90.

The benchmark stock index KOSPI rose 23.61 percentage points, or 1.26 percent, to close at 1,899.76 on the back of purchases by foreign investors.

cha@donga.com achim@donga.com