South Korea Set to Follow Australia in Holding Rates as Inflation Persists

South Korea will probably follow Australia’s lead and refrain from cutting interest rates tomorrow as the global economy shows signs of strength and officials highlight price pressures.

The Bank of Korea will keep the benchmark seven-day repurchase rate unchanged at 3.25 percent according to 18 of 19 economists in a Bloomberg News survey. One analyst sees a cut to 3 percent.

U.S. growth, “robust” indicators from China and progress in taming Europe’s debt crisis encouraged Australian policy makers to keep rates on hold yesterday, the central bank indicated. South Korea’s expansion may gradually pick up pace in the second half of this year as global conditions improve, the Bank of Korea said yesterday .

“We no longer expect rate cuts in 2012, given the stronger-than-expected global growth momentum and signs of improvement in Europe’s financial condition,” said Kwon Goohoon, a Goldman Sachs Group Inc. economist in Seoul who formerly worked for the International Monetary Fund.

In the past three weeks in the Asia-Pacific region, Sri Lanka raised rates, Thailand cut, and Malaysia and New Zealand made no change. India also paused, while cutting reserve requirements for banks. South Korea has kept benchmark borrowing costs unchanged since June after five increases from financial- crisis lows.

Inflation Expectations

A dip in the Korean inflation rate to 3.4 percent in January was largely because of a high year-earlier level, the central bank said in a report to the National Assembly yesterday. Price pressures will likely persist on elevated inflation expectations and unstable oil costs, it said.

“Given a tight labor market, persistent inflation expectations, and loose monetary conditions, we see no scope for rate cuts this year” in South Korea, Erik Lueth, a Hong Kong- based economist at Royal Bank of Scotland Group Plc., said. It is “too early to call an end to inflation” and economic growth is “not weak enough to warrant interest cuts,” Lueth said.

Asia’s fourth-largest economy is getting some fiscal support from plans for 60 percent of this year’s government spending to occur in the first six months. South Korea’s Kospi Index climbed 0.4 percent yesterday as Greek lawmakers worked to secure a bailout. The won rose 0.2 percent 1,118.53 per dollar in Seoul, according to data compiled by Bloomberg.

Stevens’ Views

Reserve Bank of Australia Governor Glenn Stevens and his board unexpectedly left the overnight cash-rate target at 4.25 percent yesterday. The decision was predicted by three of 27 economists surveyed by Bloomberg News. The other 24 forecast a quarter percentage-point reduction.

“The acute financial pressures on banks in Europe were alleviated considerably late in 2011 by the actions of policymakers,” Stevens said yesterday. “Much remains to be done to put European sovereigns and banks on a sound footing, but some progress has been made.”

Financial market sentiment has also improved, he said. In the U.S., the world's biggest economy, a sinking jobless rate has added to signs of a revival.

The Bank of Korea and the South Korean government both forecast the nation’s economy will grow 3.7 percent this year after a 3.6 percent gain last year. Hyundai Motor Co., South Korea’s largest automaker, reported a jump in fourth-quarter profit, fueled by U.S. demand.

Bank of Korea Governor Kim Choong Soo said on Jan. 17 that South Korea’s interest rates are still “accommodative” and indicated that they will need to rise at some time.

To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net;

To contact the editors responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net;

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