BOK Signals No Rate Cut Needed Now as Outlook Improves

Bank of Korea Governor Kim Choong Soo said an improved global outlook increases the odds of South Korea exceeding this year’s growth forecast, signaling that further monetary easing isn’t necessary for now.

Asia’s fourth-largest economy is likely to achieve 2.8 percent growth, Kim, 65, said in an interview in Seoul yesterday. “I bet a little bit more on the upside than the downside,” Kim said, adding that domestic liquidity is “abundant.”

The won strengthened and the yield on the three-year government bond rose from yesterday’s record low as Kim’s comments damped investor expectations for policy makers to cut rates. Economists are split on the outlook for borrowing costs, with Barclays Plc expecting no rate change this year, while Goldman Sachs Group Inc. said in a Feb. 12 research note that it forecasts a reduction in April.

“Governor Kim’s comments add further conviction to our view that the monetary easing cycle in Korea is over,” Ronald Man, a Hong Kong-based analyst at HSBC Holdings Plc, said in an e-mail. “Our call for the next move to be a hike, from as soon as the third quarter of this year, remains intact.”

The won was up 0.3 percent to 1,078.30 per dollar in Seoul as of 3 p.m., according to data compiled by Bloomberg. The yield on 2.75 percent bonds due December 2015 rose two basis points, or 0.02 percentage point, to 2.71 percent today.

Global Sentiment

Talking of global sentiment, Kim said he sensed at the G-20 gathering of central bankers and finance ministers that “the whole mood is improving” even as officials await more evidence of economic gains. The won climbed 23 percent against the yen in the past six months, with South Korea expressing concern at Japan’s economic policies before and after a Group of 20 nations meeting in Moscow.

The BOK kept the benchmark seven-day repurchase rate at 2.75 percent on Feb. 14 after 25-basis-point cuts in July and October. For a second month, the decision wasn’t unanimous. In January, BOK board member Ha Sung Keun called for a rate cut to curb excessive appreciation of the won and support the weak economy.

Asked to comment on investors expecting a rate cut after the split votes by the monetary policy committee, Kim said, “I represent the views of the committee. What matters is the decision of the MPC.”

Low Pace

He added that while the low pace of inflation would in theory allow room for monetary easing, the impact of such a move would be muted because of the abundant liquidity in the market.

“There is no reason not to lower the rate, but there is no reason to lower it,” he said.

Another board member, Moon Woo Sik, said last month that he saw no immediate need to alter benchmark interest rates and it’s “too early” for any central-bank response to the won’s gain against the yen.

A stronger won erodes the competitiveness of exporters such as Samsung Electronics Co., which said last month that currency gains could reduce its operating profit by 3 trillion won ($2.8 billion) this year. Kia Motors Corp. reported a 51 percent slump in operating profit last month and said it expects a difficult year.

Bank Target

Consumer prices rose 1.5 percent in January, below the central bank’s target range of 2.5 percent and 3.5 percent, while economic growth picked up to 0.4 percent in the fourth quarter from 0.1 percent in the previous three months.

Japan’s “expansionary policy operations” and fiscal tightening in advanced nations are among risks for a South Korean economy that is showing signs of gradual improvement, the central bank said on Feb. 14. The front-loading of government spending in the first half of the year is already giving growth a boost and Deutsche Bank AG says a supplementary budget may be announced by President-elect Park Geun Hye’s administration in March.

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