BOK Signals No Cut in South Korea Rates as Domestic Demand Counters Europe
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
Bank of Korea Chief Says Rates Still ‘Accommodative'
SeongJoon Cho/Bloomberg
South Korea's inflation rate has remained elevated in recent months in part because a weakening exchange rate has made imported goods more expensive.
South Korea's inflation rate has remained elevated in recent months in part because a weakening exchange rate has made imported goods more expensive. Photographer: SeongJoon Cho/Bloomberg
Bank of Korea Governor Kim Choong Soo
SeongJoon Cho/Bloomberg
Kim Choong Soo, governor of the Bank of Korea, said last week that South Korea may get on a normal recovery path in the second half of the year.
Kim Choong Soo, governor of the Bank of Korea, said last week that South Korea may get on a normal recovery path in the second half of the year. Photographer: SeongJoon Cho/Bloomberg
Bank of Korea Governor Kim Choong Soo said that South Korea’s interest rates are still below policy makers’ desired level and that discrepancy cannot be left for long.
“We still think our monetary policy is accommodative --by that what I mean is that in the market there still exists a little excess liquidity,” Kim, 64, said in an interview at his office in Seoul today. “Our basic policy direction is to normalize our interest rates compatible with our demand pressures and pressures for inflation.”
The BOK, which kept its benchmark rate at 3.25 percent unchanged four days ago, will need to proceed “cautiously” given instability in external economies, the governor said. At the same time, he predicted growth in South Korea, Asia’s fourth-largest economy, will be little changed this year compared with 2011 as domestic demand offsets an export slowdown.
“Discrepancy cannot be maintained for a long period of time” between actual interest rates and the desirable level, Kim said, without disclosing what the BOK’s calculation is for the so-called neutral rate. “In that case, all sorts of distortions in structure will occur. So it is not wise to maintain such discrepancies for long period of time. That is why I said we have to move but we have to move very cautiously.”
Yields Rise
The yield on South Korea’s 3.5 percent bonds due September 2016 climbed two basis points, or 0.02 percentage point, to 3.50 percent at the close in Seoul, according to Korea Exchange Inc. Three-year bond futures fell 0.1 percent to 104.45, exchange data shows. The won gained 0.8 percent to 1,145.40 per dollar, according to data compiled by Bloomberg.
“There was a certain amount of expectation in the market for a rate cut, but the BOK governor’s interview weakened the sentiment,” said Kong Dong Rak, a Seoul-based fixed-income strategist at Taurus Investment & Securities Co.
By comparison, analysts including those at Nomura Holdings Inc. and Daewoo Securities Co. see the central bank’s next move as a reduction, coming in April.
Turning to risks posed by Europe, which provides more than one-third of the foreign capital that flows into South Korea, Kim said he’s not as pessimistic as some observers. He reiterated South Korea’s readiness to help in broader efforts to stem the crisis.
‘Active Roles’
“The G-20 and IMF should play more active roles” in addressing Europe’s woes, the governor said today. He declined to specify the amount of extra resources his country is willing to provide the International Monetary Fund as the Washington- based lender first needs to come up with its plan.
Risks to South Korea’s economy are increasing and inflation may ease at a moderate pace as growth slows for some time before picking up, the central bank said on Jan. 13, when it decided by a unanimous vote to keep the main rate unchanged for a seventh straight month on Jan. 13. Kim said last week that South Korea may get on a normal recovery path in the second half of the year.
The nation’s inflation rate has remained elevated in recent months in part because a weakening exchange rate has made imported goods more expensive. 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 the average of 3.2 percent for the decade through 2011.
Oil prices pose another danger, after climbing 16 percent in the past three months. Kim signaled today that monetary policy options are limited to respond to oil, saying “in case oil prices are up, our inflation will go up and our growth rate will go down and it’s kind of unavoidable. Of course domestically we can introduce some policies but those policies will be economically speaking very costly.”
The BOK forecast in December that the economy will grow 3.7 percent in 2012 and 4.2 percent in 2013 after a 3.8 percent expansion in 2011. Consumer prices may increase 3.3 percent this year after a 4 percent gain in 2011, according to the projections.
To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net;
To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net
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