Bloomberg News

South Korea Holds Rates, BOJ Talks Stimulus on World Risks

October 13, 2011

(Updates with economist quote in fourth paragraph.)

Oct. 13 (Bloomberg) -- The Bank of Korea kept interest rates on hold and the Bank of Japan said its board had discussed more monetary easing, in further signs policy makers are moving to protect growth as the global economy weakens.

Governor Kim Choong Soo and his board held the benchmark seven-day repurchase rate at 3.25 percent for the fourth straight month, the central bank said in Seoul today. In Japan, records of a BOJ meeting last month said “a few” members discussed extra stimulus.

Asian policy makers are bolstering efforts to defend their economies from weakening growth in the U.S. and Europe, with Indonesia’s central bank unexpectedly cutting borrowing costs and the Philippines unveiling a stimulus plan this week. In South Korea, Kim said no board member argued in favor of an interest-rate cut even as the central bank said “downside risks” to the domestic economy exceeded upside risks.

“We expect the BOK to remain on hold for now,” said Wai Ho Leong, a senior regional economist at Barclays Capital in Singapore. It may refrain from easing unless there’s “a sudden and unforeseen deterioration in global growth,” he said.

The won rose 0.8 percent to 1,157.65 per dollar as of 1:07 p.m. in Seoul, according to data compiled by Bloomberg. The benchmark Kospi index gained 1 percent. The currency lost more than 8 percent over the past three months, Asia’s second-worst performance, fueling inflationary pressure by increasing import costs. The Bank of Korea’s decision, which was unanimous, was predicted by all 15 economists surveyed by Bloomberg News.

‘Accommodative’ Policy

“Our monetary policy is still seen as accommodative,” Kim told a news conference today. “Our will to normalize interest rates has not changed. We will make sure to prevent inflation from becoming chronic.”

A deepening European debt crisis and a struggling U.S. recovery have prompted emerging-market nations to opt to support their economies rather than combat inflation. Brazil, Turkey, Russia and Pakistan have cut borrowing costs in 2011.

Bank Indonesia lowered its reference rate by a quarter of a percentage point to 6.5 percent this week, defying the predictions of all 15 economists surveyed by Bloomberg News. Philippine President Benigno Aquino announced a 72 billion-peso ($1.7 billion) spending package yesterday as his government cut growth estimates.

At a BOJ board meeting last month, a few members “expressed the view that further monetary easing might become necessary depending on future developments,” considering risks such as Europe’s sovereign debt crisis, according to a record of the board’s Sept. 6-7 meeting released in Tokyo today.

European Crisis

“Many members” said the risk of Europe’s crisis putting downward pressure on Japan’s economy was increasing, according to the BOJ document.

Other major economies have already expanded stimulus. The European Central Bank said last week it will reintroduce purchases of covered bonds while the Bank of England increased its asset-purchase program. The Federal Reserve is replacing short-term debt in its portfolio with longer-term Treasuries.

The BOJ left its overnight-rate target between zero and 0.1 percent and kept its credit programs unchanged at its last meeting on Oct. 6-7. The next gathering is on Oct. 27.

“The markets look like they are stabilizing and the economic data is encouraging for BOJ monetary policy, so the likelihood of the BOJ taking action is low,” said Junko Nishioka, chief economist at RBS Securities Inc. in Tokyo and a former BOJ official. She said the central bank may expand its 15-trillion yen ($195 billion) asset-buying program by 5 trillion to 10 trillion yen if the European crisis causes more market turmoil.

Economic Impact

Weakening overseas demand is taking a toll on both Japan and South Korea. In Japan, exports, industrial output and retail sales all undershot economist estimates last month. In South Korea, exports, equivalent to about half the economy, grew at a slower pace in September. Industrial production slid 1.9 percent in August from July, when it decreased 0.3 percent.

The Bank of Korea said in a statement after today’s decision that “downside risks to growth have increased” because Europe’s debt woes may spread and advanced economies show signs of “sluggishness.”

Samsung Electronics Co., the world’s second-largest maker of mobile phones, has a “conservative” earnings forecast for the second half of this year because of global economic developments, Hong Chang Wan, head of the company’s home appliance business, said last week.

Inflation Eases

Consumer-price increases in South Korea eased to 4.3 percent from a year earlier last month, after a 5.3 percent surge in August. The latest inflation figure remains above the Bank of Korea’s target ceiling of 4 percent.

South Korea’s consumers predict that price increases will accelerate, with the expected inflation rate over the next 12 months at 4.3 percent in September, faster than 4.2 percent in the previous month and the highest since November 2008, a survey by the Bank of Korea showed last month.

Kim urged the nation’s lawmakers to approve a free-trade agreement with the U.S. "as soon as possible," saying the deal will provide a "big opportunity" for the South Korean economy to grow. The U.S. Congress passed the deal yesterday.

The Bank of Korea raised interest rates for the third time this year in June to fight inflation.

“I see no rate change well into next year and if things get really ugly, even a rate cut is possible to boost the economy,” said Yoon Yeo Sam, a fixed-income analyst at Daewoo Securities Co. in Seoul.

--With assistance from William Sim in Seoul and Masahiro Hidaka in Tokyo. Editors: Ken McCallum, Paul Panckhurst

To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net; Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net

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


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