Roundup: S. Korea freezes policy rate at record low for 2 months

South Korea's central bank froze its policy rate at a record-low level Thursday, keeping a wait-and-see position for two months amid mixed factors, including the expected rate hike in the United States and the lingering effect from the outbreak of Middle East Respiratory Syndrome (MERS).

Bank of Korea (BOK) Governor Lee Ju-yeol and six policy board members decided to keep the benchmark seven-day repurchase rate on hold at an all-time low of 1.5 percent.

It was in line with market expectations. According to a Korea Financial Investment Association survey of 113 fixed-income experts, 98.2 percent predicted the rate freeze.

Downside risks to the economy remained as the MERS aftermath still rattled private consumption and the service industry amid the global economic downturn.

Exports, which account for about half of the Asia's No. 4 economy, dipped 3.3 percent in July from a year earlier, maintaining a downward trend for seven months in a row.

The South Korean government declared a de-facto end of the MERS crisis last month, but the service sector and private consumption remained lackluster. The finance ministry said in its monthly economy report that the MERS effect still dragged down the domestic economy.

The deadly viral disease, the first case of which was found on May 20, had infected 186 people, killing 36 among them. The death toll and the contagion number have been unchanged for more than a month.

Retail sales had yet to get back on a full recovery track despite a modest recovery. Sales in department stores rose 0.9 percent in July from a year earlier after tumbling 11.9 percent in June. Revenue in discount outlets slid 1.9 percent last month, down from a 10.2 percent drop in the previous month.

To bolster the MERS-hit economy, the BOK lowered its policy rate by a whopping 1 percentage point from August 2014 to June 2015. The government unveiled about 20 billion U.S. dollars of fiscal stimulus package, including a supplementary budget plan for the second half.

Despite the soft export growth and the faltering domestic demand, the BOK was widely expected to refrain from altering the rate for the time being as the U.S. Federal Reserve would raise its zero-level policy rate by the end of this year.

If the BOK lowers its policy rate further, foreign capital could flow out of South Korea's financial market after the Fed's rate hike. Central banks of Australia, India and Thailand froze policy rates earlier this month on expectations for the Fed's monetary tightening as early as September.

Massive household debts in South Korea, which almost reached 1 trillion U.S. dollars, also discouraged BOK policy board members from easing monetary policy further.

The record-low interest rate and easing regulations on mortgage

financing led the country's household debts to grow at a rapid pace in recent months.

Kwon Young-sun, a Hong Kong-based economist at Nomura, forecast that the BOK would keep the policy rate on hold as late as the third quarter of next year, but he said that the bank may cut the rate further if exports remain downward in the third quarter of this year. Endi