South Korean Rate-Cut Case Diminishes as Oil Adds Price Pressures: Economy

South Korea’s case for cutting interest rates is diminishing as domestic sentiment improves and gains in oil costs threaten to push inflation beyond the government’s forecast.

Manufacturers’ confidence on the prospects for March rose to a five-month high, increasing to 84 from 81, a Bank of Korea index showed in Seoul today. Sentiment also improved at other businesses, the report said. Data last week showed consumer confidence at a three-month high.

South Korean stocks fell today after Finance Minister Bahk Jae Wan said Feb. 25. that oil costs will have “far-reaching effects” on Asia’s fourth-largest economy and may drive consumer-price gains beyond a full-year estimate of 3.2 percent. Monetary easing in the U.S., Europe and Japan also adds to inflation pressures, Bahk said in an interview at a Group of 20 nations meeting in Mexico City.

“The Bank of Korea will likely stand pat until late this year as rising oil prices limit policy room,” said Kong Dong Rak, a fixed-income analyst at Taurus Investment & Securities Co. in Seoul.

The Kospi Index fell 1.3 percent as of 12:48 p.m. local time on concern about oil costs and weakness in the yen, which makes Korean goods less competitive with those of export rival Japan. The Bank of Korea has kept rates on hold for eight months as officials monitor progress in taming Europe’s debt crisis, which poses a threat to exports.

‘Danger Zone’

Asian stocks swung between gains and losses with the MSCI Asia Pacific Index falling 0.2 percent as of 12:52 p.m. in Tokyo after the Group of 20 nations told Europe to come up with more financial firepower before they consider lending outside support. The world economy is “not out of the danger zone” amid fragile financial systems, high debt and higher world oil prices, International Monetary Fund Managing Director Christine Lagarde said.

Oil retreated 0.2 percent following the longest rally since January 2010 last week.

South Korea’s Kim Choong Soo, the governor of the central bank, said he suspected that more stimulus by advanced economies was not the right solution for reviving global growth, in remarks prepared for a Feb. 25 seminar in Mexico.

Defusing the European debt crisis is crucial to aid confidence in emerging economies, the group best-placed to lead an economic rebound, Kim said. For now, those nations may hold off on measures to stimulate growth as they wait to see whether a “much worse scenario” emerges from the euro area’s woes, the central banker said.

‘Worst is Over’

Kim and his board kept the benchmark seven-day repurchase rate unchanged at 3.25 percent this month. Barclays Capital said Feb. 24 report the level may stay unchanged this year.

“There is a growing perception that the worst is over for Korea’s growth and that weakness in domestic demand during the latter part of last year was due to a temporary decline in sentiment-sensitive activity, as fears over Europe were rekindled,” the investment bank said.

Elsewhere in Asia, Thailand’s industrial production probably dropped 14 percent in January after a 26 percent decline in December, economists surveyed by Bloomberg predicted ahead of a report by the Office of Industrial Economics today.

In Europe, France may say producer prices rose 4.1 percent in January from a year earlier, while business confidence in Italy was near a two-year low, according to Bloomberg surveys of economists.

An index of U.S. pending home sales probably rose 1 percent in January from the previous month, boosting signs of stabilization in the nation’s housing market, economists predict before a report from the National Association of Realtors today. The Federal Reserve Bank of Dallas may say its index of manufacturing activity rose to 15.5 this month from 15.3 in January, a separate survey showed.

In South Korea, the business survey, conducted from Feb. 13 to Feb. 20, was based on responses from 1,623 manufacturers and 880 other businesses. The measure of expectations at non- manufacturing companies advanced to 80 from 79, the first increase since October.

To contact the reporter 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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