Bank of Korea to freeze key rate for Oct.: poll
October 6, 2009 10:37 pm
SEOUL, Oct. 7 — South Korea's central bank is widely expected to freeze its key interest rate for an eighth straight month in October as a nascent economic recovery has yet to prove sustainable, a poll showed Wednesday.
Economists at 16 financial institutions predicted that the Bank of Korea (BOK) will keep the benchmark seven-day repo rate steady at a record low of 2 percent on Friday, according to the poll by Yonhap Infomax, the financial news arm of Yonhap News Agency.
The BOK cut the key rate by a total of 3.25 percentage points between October and February in an effort to put the brakes on a sharp economic freefall.
"A rate freeze for October is expected as inflationary pressure has been tamed and the local economy is not in a full-fledged recovery phase," said Lee Sung-kwon, an economist at Shinhan Investment Corp. "I think conditions, including a self-sustaining recovery led by the private sector and a rise in inflationary pressure, are necessary for a possible rate hike."
A set of economic data are fueling growing optimism that the South Korean economy, Asia's fourth-largest, is recovering at a faster-than-expected pace compared to other countries, raising expectations that the BOK may hike the rate in the near term.
South Korea's industrial output posted an on-year expansion for the second straight month in August although it declined 1.3 percent compared with a month earlier. In September, Korea's exports stopped a 10-month run of double-digit annual declines.
Analysts said the question revolves around when the BOK will begin to take steps shifting from its accommodative easing to a tight bias.
Tensions over rate policy have flared recently between the BOK and the government, which has reiterated that it will stick to an "expansionary" economic stance as it is too early to say that the economy is making a full recovery.
But amid concerns that a sharp gain in home-backed lending may spark a potential asset bubble, BOK Gov. Lee Seong-tae hinted on Sept. 10 that the bank may conduct a rate increase if housing prices continue to rise.
Some experts say the Australian central bank's unexpected rate hike could give some room for the BOK to raise borrowing costs as the move suggests the timing for implementing an exit strategy could differ depending on each country's economic fundamentals. The Reserve Bank of Australia raised the key rate on Tuesday, becoming the first central bank among 20 advanced and developing countries to do so since the global financial crisis started.
Economists are divided over when the BOK will hike the rate, with some arguing that it is possible for the central bank to shift to a tightening stance as early as November.
"The BOK has warned of rising housing prices and loan growth, signaling a rate hike. In October, it could give a further hint and the bank is likely to take action in November," said Shin Dong-jun, an analyst at Hyundai Securities Co.
But others said the BOK is expected to increase the policy rate in the first quarter of next year, saying that there are still uncertainties surrounding the economic recovery and a possible rate hike would put upward pressure on the local currency, which has gained about 34 percent to the greenback since March. (PNA/Yonhap)
ALM/ebp
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