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Korea Seen Cutting Rates to Spur Growth as Election Looms

South Korea’s weakest inflation in 12 years may encourage the central bank to cut interest rates tomorrow for the second time this year, as Europe’s debt crisis hurts exports and fuels pressure for stimulus across Asia.

Fifteen of 16 economists in a Bloomberg News survey say the seven-day repurchase rate will fall to 2.75 percent from 3 percent. Indonesia and the Philippines may keep their benchmarks unchanged at record lows tomorrow after price gains accelerated, separate Bloomberg News surveys show.

South Korea’s finance ministry this week announced 5.9 trillion won ($5.2 billion) of spending and tax relief to shield an economy already showing some resilience to the global slowdown, with unemployment at an eight-month low according to a report released today. The government’s efforts to spur growth before a December election to replace President Lee Myung Bak may encourage the central bank to act in tandem.

“The Bank of Korea knows that it makes sense to cut rates now so that it’s moving hand-in-hand with the government’s stimulus moves,” said Sun Yoo, chief economist at Woori Investment & Securities Co. in Seoul.

Asian stocks rose today after Premier Wen Jiabao said that China had ample room for fiscal and monetary measures and as investors speculate that the Federal Reserve will do more to support the U.S. economy. The MSCI Asia Pacific Index rose 1.1 percent as of 10:50 a.m. in Tokyo.

South Korea’s jobless rate was at 3.1 percent in August, unchanged from the previous month, Statistics Korea said today in Gwacheon, south of Seoul. That was less than economists’ median forecast of 3.2 percent.

‘Sluggish’ Growth

At the same time, the nation’s expansion is “sluggish” because of deterioriations in exports and manufacturing and the limited scale of fiscal stimulus means the central bank is under pressure to ease, according to a note today from DBS Group Holdings Ltd., a bank in Singapore.

Gross domestic product grew 0.3 percent in the second quarter from the previous three months, down from 0.9 percent in the first quarter. Consumer prices increased 1.2 percent from a year earlier in August, the least since the year 2000, held down by government subsidies for child care.

“The Bank of Korea was concerned by a review of growth in June that showed slack opening up in the economy,” said Wai Ho Leong, a senior regional economist at Barclays Plc in Singapore, who expects a rate reduction. “On the fiscal side, the government wants to fully employ all the budgeted money that’s available to prevent any slippage in job creation, ahead of elections.”

Dictator’s Daughter

Park Geun Hye, whose father ruled South Korea as dictator for 18 years, is the presidential candidate of the ruling New Frontier Party, while software mogul Ahn Cheol Soo is a possible contender for the opposition.

“The European crisis is lasting longer than expected and economies both in advanced and developing countries show sluggishness at the same time,” Finance Minister Bahk Jae Wan said this week. “As such, our economic recovery is being delayed and worries over possible weakness in our economic resilience seem to be growing.”

Besides Europe’s sovereign-debt woes, persistent unemployment in the U.S. is restraining global demand and China is yet to reverse a slowdown.

South Korea’s latest fiscal stimulus, including measures to boost the housing market and car sales, “will hardly beat waning consumer and business sentiment,” Kim Hyeon Wook, an economist at SK Research Institute and a former adviser to the Bank of Korea’s monetary policy committee, said after details were announced.

Indonesian Rates

In Indonesia, inflation unexpectedly accelerated in August on rising food costs. In the Philippines, central bank Deputy Governor Diwa Guinigundo said Sept. 7 that policy makers will probably raise inflation forecasts for 2012 and 2013, suggesting the bank may pause after three interest-rate cuts this year. “Monetary policy remains appropriate at this time,” he said.

Bank Indonesia will hold its reference rate at 5.75 percent, according to all 22 economists in a Bloomberg News survey. Bangko Sentral ng Pilipinas will keep its benchmark at 3.75 percent, according to 16 of 20 analysts.

New Zealand, also announcing a monetary policy decision tomorrow, will leave its key rate at 2.5 percent, a separate survey indicates.

Japan, India

Elsewhere in Asia, Japan’s machinery orders rose more than economists forecast in July, while an Australian sentiment index for September rebounded. India may report industrial production climbed in July, a Bloomberg survey showed.

European industrial output probably extended a seven-month slump in July from a year earlier, according to a separate survey. France, Germany and Spain are among economies in Europe that will release consumer-price data for August.

A U.S. report on mortgage applications is due today from the Mortgage Bankers Association, a Washington-based trade group. The Labor Department will release import price data and the Commerce Department may say inventories at U.S. wholesalers rose in July.

To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net; Cynthia Kim in Seoul at ckim170@bloomberg.net

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

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