South Korea Holds Key Rate a Seventh Month as Growth Risks Rise: Economy
Bank of Korea Governor Kim Choong Soo
SeongJoon Cho/Bloomberg
Kim Choong Soo, governor of the Bank of Korea.
Kim Choong Soo, governor of the Bank of Korea. Photographer: SeongJoon Cho/Bloomberg
Dec. 19 (Bloomberg) -- Charles Kim, a New York-based director of Mirae Asset Securities Co., talks about the death of North Korean dictator Kim Jong Il and its implications for global financial markets and Bank of Korea monetary policy. South Korea’s stocks dropped the most in five weeks and the won sank to a two-month low after Kim's death sparked concern there will be a power struggle in the communist nation. Kim speaks with Rishaad Salamat on Bloomberg Television's "Asia Edge." (Source: Bloomberg)
The Bank of Korea held off from raising borrowing costs for the seventh straight month, highlighting growing risks to its economy from Europe’s debt crisis even as a weaker won threatens to fuel inflation.
Governor Kim Choong Soo and his board kept the benchmark seven-day repurchase rate unchanged at 3.25 percent, the central bank said in a statement in Seoul today. The decision was predicted by all 14 economists surveyed by Bloomberg News.
Inflation in Asia’s fourth-largest economy is 1 percentage point higher than the average of the past decade, impinging on the central bank’s ability to protect growth. Kim has refrained from joining Australia and Thailand in cutting rates even as Europe’s woes and China’s slowing expansion damp exports, while the death of North Korean leader Kim Jong Il last month pushed manufacturers’ confidence to a 30-month low.
“I’m sure that the Koreans would love to be cutting interest rates anytime soon as the economy is losing pace but given the persistent inflationary pressures, the best choice is to hold on for a little bit,” said Yoon Yeo Sam, a fixed-income analyst at Daewoo Securities Co. in Seoul. “Once inflation eases to a comfortable level, near 3 percent, then the central bank will be able to cut interest rates and I believe it’s in April.”
While the global economic recovery will be “very slow,” inflation expectations are high and the central bank will “normalize” rates if price gains become chronic, Kim said today. Monetary policy will aim to stabilize consumer price gains at 3 percent and inflationary risks have increased “due to the heightened geopolitical risks in the Middle East,” the central bank said.
Stocks Climb
The Kospi share index rose 0.6 percent in Seoul today. The won traded 0.9 percent higher at 1,148.25 against the dollar as of 3 p.m. local time, according to data compiled by Bloomberg. The currency fell about 8 percent over the past six months, the worst performer in Asia after the Indian rupee.
The country’s stocks rose along with Asia’s benchmark index, as lower Italian and Spanish borrowing costs added to optimism Europe’s debt crisis may be contained. The MSCI Asia Pacific Index gained as much as 0.9 percent today.
South Korean import prices climbed 7.1 percent in December from a year earlier, a report showed today. Export prices rose 2.5 percent after a 5.4 percent increase the previous month.
Later Cut
“We do not expect a pre-emptive rate cut and do expect the BOK to cut rates only after they witness weaker GDP growth and lower inflation,” said Kwon Young Sun, a Hong Kong-based economist at Nomura Holdings Inc., who expects the central bank to cut rates by 0.25 percentage point each in April and July.
Elsewhere in the region, China’s foreign-exchange reserves posted the first quarterly decline in more than a decade, as foreign investment moderated, the trade surplus narrowed and investors withdrew capital amid the global financial crisis. The holdings, the world’s biggest, fell to $3.18 trillion at the end of December from $3.2 trillion at the end of September, according to People’s Bank of China data released today.
Singapore’s retail sales growth slowed, with purchases advancing 6.4 percent from a year earlier in November from a revised 8.4 percent the previous month, a report showed today.
In Europe, Finland may report inflation eased to 3.1 percent in December, Hungary’s consumer prices may have climbed 4.3 percent, and Spanish inflation may have held at 2.4 percent, according to Bloomberg surveys.
U.K. Prices Easing
U.K. producer prices probably rose 5 percent from a year earlier last month, from a 5.4 percent gain in November, according to the median of 16 estimates. Russia and Poland will release trade data.
The U.S. may report a trade deficit of $45 billion in November, while a Thomson Reuters/University of Michigan index of consumer sentiment probably climbed to 71.5 from 69.9, Bloomberg surveys showed.
South Korea’s decision to keep the benchmark rate unchanged today was unanimous, Governor Kim said. The reserve ratio can also be used as a policy tool that has a short-term impact on liquidity, even as interest rates remain the “basic” monetary policy measure and can’t be replaced by the ratio, he said.
Risks to Asia’s fourth-largest economy are increasing and inflation may ease at a moderate pace as growth slows for some time before picking up, the central bank said today. Still, South Korea may get on a normal recovery path in the second half of the year, Kim said.
A weakening won makes imported goods more expensive, keeping inflation pressures elevated. South Korea’s consumer prices rose 4.2 percent from a year earlier in November and December, exceeding the central bank’s target limit of 4 percent and more than the 3.2 percent average for the 10 years through 2011.
Tolerance Rising
“The government’s tolerance for a stronger currency is rising, as it tries to limit the pass-through from high imported energy prices to consumers,” said Wai Ho Leong, a senior regional economist at Barclays Capital in Singapore. He projects the won to rise to 1,025 per dollar in 12 months.
Leong also said the government may rely more on fiscal policy to support growth ahead of general and presidential elections this year as high household debt and rising costs of living limit the central bank’s ability to cut interest rates.
The government plans to make 60 percent of its expenditures in the first half of this year, the Finance Ministry said last month. The economy is expected to grow 3.7 percent, the slowest in three years, it said.
South Korea forecast that export growth will slow to 6.7 percent this year, from 19.6 percent in 2011, according to the Ministry of Knowledge Economy on Jan. 1. Overseas shipments rose 12.5 percent last month compared with a year earlier.
Growth in the fourth quarter may fall short of the central bank’s forecast, Kim said today. The economy is unlikely to contract, he said.
“We expect the Bank of Korea to keep rates unchanged throughout this year,” said Ryan Oh, a Seoul-based fixed-income analyst at Samsung Securities Co. “The central bank acknowledged increasing downside risks the Korean economy is facing, but this won’t lead to rate cuts as the central bank also showed in detail its concerns about inflation in the statement.”
To contact the reporter on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
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