South Korea's central bank is expected to freeze the key interest rate this month as it tries to assess the potential fallout from the U.S. Federal Reserve's decision on whether to taper its stimulus program, analysts said Sunday.
The Bank of Korea (BOK) held steady the benchmark seven-day repo rate, dubbed the base rate, at 2.5 percent in the rate decision meeting in August. The key rate stood at the same level for three months after the central bank last cut the rate by 0.25 percentage point in May.
Most market analysts predict that the central bank will stay put this month too, mainly because of signs of modest economic recovery as well as the Fed's likely stimulus tapering. BOK policymakers are scheduled to hold a monthly rate-setting meeting on Thursday.
"There are signs of gradual recovery of the domestic economy," said Standard & Chartered Bank Korea economist Yoon Eun-hye. "The key rate may be frozen in September."
Given the solid export performance as well as the estimated 1.1 percent gross domestic product growth for the second quarter, the bank has little incentive to slash the key rate further, the economist said.
The Fed's likely exit strategy will also help restrict the BOK's downward decision, Lee Hyun-joo, an analyst at Daewoo Securities Co., said.
"South Korea is under the sway of the U.S. and Chinese economies, and it is difficult for South Korea to take a monetary easing stance when the U.S. adopts an exit strategy," Lee said.
Many market players are betting that the Fed will decide to begin tapering its bond-buying stimulus program at its policy meeting slated for Sept. 17-18, potentially resulting in foreign capital flights from emerging countries.
The local central bank may move to increase the key rate in mid or late 2014, analysts predicted.
"(The BOK) is likely to continue to freeze the base rate for the rest of this year, and it may raise it in June or July next year," Hong Jeong-hye, a researcher at Shinyoung Securities Co., said. "The central bank has little possibility of cutting the base rate because it is seeking a higher-than-expected economic growth rate for next year while expecting increases in inflation."