South Korea to Weigh Second Straight Cut Against Signaling Panic

The Bank of Korea is set to consider cutting rates for a second straight month, weighing the need to prop up a deteriorating economy against the risk of signaling panic to markets.

Ten of 16 economists surveyed by Bloomberg News predict Governor Kim Choong Soo will keep the seven-day repurchase rate at 3 percent tomorrow. The rest expect a quarter percentage point cut to 2.75 percent, which would be the first consecutive reduction in more than three years.

The BOK faces increasing pressure to act after exports fell the most since 2009 on Europe’s debt turmoil and inflation eased to a 12-year low. While Kim said last month that the economy is losing steam faster than expected, policy makers may wait to see more data before cutting rates again, according to economist Wai Ho Leong.

“Dropping rates back-to-back after a long period of holding rates might convey an undesired sense of panic in the market,” said Leong, a senior regional economist at Barclays Plc in Singapore. Policy makers may “prefer to deliver easing in a more calibrated fashion, conditional on data releases,” Leong said.

Indonesia also decides monetary policy tomorrow and will probably keep interest rates unchanged for a sixth month, according to 25 of 26 economists in a Bloomberg survey. The Bank of Japan (8301) may refrain from adding monetary stimulus for a fourth time, according to all 22 economists polled. The State Bank of Pakistan is scheduled to decide on borrowing costs on Aug. 10.

“For Asia as a whole, we won’t see rampant rate cuts,” said Sanjay Mathur, Singapore-based head of research and strategy for non-Japan Asia at Royal Bank of Scotland Group Plc. “The economic environment is not dire enough to say we need to cut rates aggressively.”

Australia Unchanged

Australia’s central bank kept interest rates unchanged at a developed-world high yesterday, citing a domestic expansion that’s weathering a global slowdown. A U.S. government report last week showing the economy added more jobs than forecast in July damped speculation the Federal Reserve will resort to a third round of asset purchases.

“We expect the BOK to keep rates unchanged at 3 percent at its August 9 meeting following the surprise 25 basis-point cut in July,” said Kwon Young Sun, a Hong Kong-based economist at Nomura Holdings Inc. “The BOK also may want to keep its powder dry” until the Fed or European Central Bank eases.

The Fed said Aug. 1 after a policy meeting it “will provide additional accommodation as needed” to spur growth and employment.

Weaker Won

The benchmark Kospi (KOSPI) share index and the won were little changed yesterday. The won has fallen about 5.4 percent over the past 12 months, one of Asia’s worst performers, helping to offset export declines at South Korea’s largest companies.

Hyundai Motor Co. (005380), South Korea’s largest automaker, reported second-quarter profit that beat analysts’ estimates as sales of the Tucson sport-utility vehicle helped the company buck an industrywide drop in Europe.

Still, South Korea will probably fail to meet the BOK’s 3 percent growth forecast for this year, said Ma Tieying, an economist with DBS Group Holdings Ltd. in Singapore, who is predicting a cut to 2.75 percent tomorrow. BOK Governor Kim said July 25 that the nation may fail to meet the 3 percent estimate, while Finance Minister Bahk Jae Wan said yesterday he’s still hoping to achieve such an expansion.

“If the BOK doesn’t change rates this week, it will likely move in September,” Ma said. “The faster-than-expected slowdown in economic growth puts pressure on the BOK to add stimulus.”

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

To contact the editor responsible for this story: Scott Lanman at slanman@bloomberg.net

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