Bank of Korea to keep key rate at 6-year high as global uncertainties persist

Bank of Korea to keep key rate at 6-year high as global uncertainties persist

	Published : Tue, 08 Jan 2008 08:30 By : Agencies Print this Story

SEOUL (Thomson Financial) - The Bank of Korea is expected to leave its policy rate target at 5 percent for the fifth straight month as the global market turmoil and record oil prices threaten to derail the country's growth momentum.

Ten economists and analysts polled by Thomson Financial are expecting the BoK to maintain the status quo on January 10, the first meeting of the year, at a time of rising household debt and as the country prepares to swear in a new government.

President-elect Lee Myung-Bak is scheduled to take office on February 25.

The bank hiked its benchmark call rate target by a total of 50 basis points last year, pushing it to the current six-year high of 5 percent and placing it above the Fed's funds target of 4.25 percent.

The gap could widen if the Fed opts to cut its key rate further at its January 29-30 meeting.

'I am not expecting rates to be adjusted this month given latent uncertainties surrounding global economies, especially the US,' said Lee Sang-Jae, economist at Hyundai Securities.

'The bank will also try to stand back as local financial markets remain unstable, with market lending rates on the rise.'

Uncertainties prevail

External uncertainties have made the Bank of Korea less optimistic about the country's growth outlook. The central bank is estimating that Asia's fourth largest economy will expand by 4.7 percent in 2008. This compares to the estimated 4.8 percent expansion for 2007, and is lower than private research institutes' prediction for 5.0-5.1 percent growth.

The US economy may be on the verge of a recession based on the number of people unemployed. The Labour Department said the jobless rate rose to 5 percent in December from 4.7 percent in November. Payrolls rose by 18,000 in December in the US, South Korea's second largest trading partner, the fewest new jobs since 2003 and a quarter of what economists had forecast.

'Since 1949, the unemployment rate has never risen by this magnitude without the economy being in recession,'' John Ryding, chief US economist at Bear Stearns in New York, said in a note to clients.

Another key indicator that the central bank will keenly watch out for is consumer spending, which accounts for more than two thirds of the US economy, to determine if the US may already be in recession. The US Commerce Department will release December retail sales figures on January 15.

The BoK is also expected to examine new economic policies to be dished out by the new government. This is to ensure that the new policies are implemented with inflation in mind.

'The new government's economic stimulus package needs to be in tune with the central bank's monetary policy. It would be good for the bank to pause for a while to ponder its mid- to long-term policy direction, without adjusting rates,' said Lee Sung-Kwon, economist at Goodmorning Shinhan Securities.

The BoK's dilemma

The central bank is facing a dilemma in that consumer prices are rising while the downside risk for the economy is growing, which means the BoK could stand pat for a while.

But some economists are expecting the scales to tip toward a tightening bias as early as the second quarter if inflation creeps up faster than previously expected.

South Korea's consumer price index accelerated further in December to 3.6 percent year-on-year, breaching the central bank's target range of 2.5-3.5 percent. Inflation could spike further if energy and grain prices remain stubbornly high and if the won continues to lose its value against the dollar, leading to higher import prices.

South Korea is totally dependent on imports for its oil needs.

Lee, the president-elect, attracted voters with his '747' campaign pledge -- meaning that he is aiming for 7 percent annual economic growth, an increase in per capita income to 40,000 US dollars and to make the economy the world's seventh-largest by encouraging market forces over the next five years.

Lee has vowed to reform the public sector and promote investment through deregulation and tax changes, and has suggested the building of a 14-trillion won trans-Korean canal to slash transportation costs.

'There is a possibility that the government may revise upward its growth forecast for this year to 6 percent, reflecting a string of new policies to boost domestic demand,' said Chun Chong-Woo, economist at SC Firstbank, who expects inflation to remain high throughout the year.

Below is a summary of forecast for the BoK's rate decision:

CJ Investment & Securities - 5 percent (unchanged)

Hyundai Securities - 5 percent (unchanged)

Korea Investment & Securities - 5 percent (unchanged)

SC Firstbank - 5 percent (unchanged)

NH Investment & Securities - 5 percent (unchanged)

Daewoo Securities - 5 percent (unchanged)

Hana Daetoo Securities - 5 percent (unchanged)

Korea Exchange Bank - 5 percent (unchanged)

Goodmorning Shinhan Securities - 5 percent (unchanged)

Hanyang Securities - 5 percent (unchanged)

saeromi.shin@thomson.com

---- by Shin Saeromi ----

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