Nomura Predicts Rate Rise in Split With Goldman: Korea Markets

Nomura Holdings Inc., the most-accurate forecaster of Bank of Korea action in the past six months, is sticking with its outlook for interest-rate increases after Goldman Sachs Group Inc. predicted a cut.

Kwon Young Sun, Hong Kong-based economist at Nomura, has a 4 percent prediction for 2014 economic expansion, faster than the central bank’s 3.8 percent, as a rebounding U.S. economy and a stronger dollar ease pressure on exports. The gap between three- and 10-year sovereign yields widened to a three-year high of 79 basis points on Jan. 8 on growth optimism. The won slid 1.1 percent against the greenback this year.

Bank of Korea Governor Kim Choong Soo, set to retire on March 31, will hand off a two-speed economy as exports boom and household debt damps domestic demand. While political pressure for rate cuts may intensify as President Park Geun Hye faces municipal elections on June 4, Nomura sees few economic reasons.

“A solid job market, bottomed-out inflation and improved GDP growth suggest no need to cut rates,” said Kwon, who was the only analyst among 16 to predict the BOK would be on hold rather than cut in September 2012. “However, if the new BOK governor turns out to be very dovish, there is a political risk of a rate cut even though macro situations improve,” he said in a Jan. 17 e-mail interview.

Board members kept the benchmark rate unchanged at 2.5 percent on Jan. 9, citing strength in Asia’s fourth-biggest economy. That day the central bank projected growth will accelerate from 2.8 percent in 2013.

Political Pressure

Ruling party lawmaker Chung Woo Taik urged the BOK to cut its interest rate significantly to help the economy, Yonhap Infomax reported on Jan. 8. Easing the pace of won gains would be an efficient policy to protect exporters, Chung said, according to the report.

The political pressure may intensify as the municipal ballots are the biggest elections since Park took office in February 2013, according to a Jan. 13 report by Woori Investment & Securities fixed-income strategist Peter Park.

Goldman Sachs expects a 25 basis point rate cut “in the near term” on concern about tightening domestic financial conditions, Seoul-based economist Kwon Goohoon wrote in a Jan. 9 report. It sees a 3.7 percent expansion in the Korean economy this year, a Jan. 16 report showed.

Weaker Won

The won weakened 0.4 percent to 1,063.60 per dollar yesterday, according to data compiled by Bloomberg. The yield on Korea’s three-year government bonds fell one basis point, or 0.01 percentage point, this year to 2.9 percent while 10-year rates rose eight basis points to 3.65 percent, Korea Exchange Inc. prices show.

While there is a bias for the dollar to rise against the won, there is still the chance of a rate cut to revive the local economy, Adam McCabe, who helps oversee $6 billion as deputy head of Asian fixed income at Aberdeen Asset Management Plc in Singapore, said in a Jan. 15 interview.

“Korea has one of the region’s more appealing bond markets,” he said. “There is room for the Korean central bank to ease monetary policy if it needs to as the domestic economy continues to disappoint.”

Ups and Downs

The economy may not improve as projected by the central bank, said Moon Dong Hoon, managing director in the fixed-income division of KB Asset Management, which oversees 15 trillion won ($14.1 billion) of assets. Ups and downs in the economy may prompt monetary authorities to lower rates, Seoul-based Moon said in an interview yesterday.

Household debt rose to an all-time high of 991.7 trillion won as of Sept. 30, central bank data showed. Sizable liabilities and external uncertainty can be a drag on private consumption and corporate investment, the BOK said on Jan. 9.

South Korea will probably begin to raise rates in the fourth quarter, according to the median estimate of 28 economists surveyed by Bloomberg News. Eight analysts from Barclays Plc to HSBC Holdings Plc expect a 25 basis point increase by the third quarter, while Goldman and ING Bank NV project a cut in the first and second quarters respectively.

Exports will increase 6.4 percent this year after an estimated 2.2 percent gain in 2013, the trade ministry said on Jan. 1. The unemployment rate was 3 percent last month, close to the record low of 2.9 percent in November. Producer prices fell 0.4 percent in December from a year ago, the least since September 2012. Consumer-price inflation of 1.1 percent last month accelerated from a 14-year low of 0.9 percent in October.

“The underlying trend in growth and job creation is still positive, with manufacturing, trade and commerce continuing to add jobs in December,” said Wai Ho Leong, a Singapore-based economist at Barclays.

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