Bloomberg News

South Korea Maintains Rates After North’s Rocket Launch

April 13, 2012

Kim Choong Soo, governor of the Bank of Korea. Photographer: Jean Chung/Bloomberg

Kim Choong Soo, governor of the Bank of Korea. Photographer: Jean Chung/Bloomberg

The Bank of Korea kept borrowing costs unchanged for a 10th straight month after North Korea launched a rocket and as austerity measures in developed economies limit demand for exports.

Governor Kim Choong Soo and his board held the benchmark seven-day repurchase rate at 3.25 percent in a meeting before a launch that North Korea’s official news service said failed to enter its preset orbit. The unanimous rate decision was predicted by all 13 economists surveyed by Bloomberg News.

South Korean stocks and the won rose today after Japanese Defense Minister Naoki Tanaka said the rocket flew for more than a minute and fell into the sea. The South’s president, Lee Myung Bak, called an emergency Cabinet meeting and the central bank said it will move to stabilize markets if necessary.

“Although export growth has slowed, the Monetary Policy Committee appraises economic growth to have shown signs of a moderate recovery, with consumption and construction investment increasing,” the central bank said in a statement. “The domestic economic growth rate will gradually return to its long- term trend going forward, although downside risks remain due mostly to the impacts of external risk factors.”

The won gained 0.5 percent to close at 1,135.00 per dollar in Seoul after earlier touching a one-week high of 1,131.25, according to data compiled by Bloomberg. The Kospi stock index rose the most in a month, gaining 1.1 percent to 2,008.91.

Plan to Meet

North Korea fired the rocket at about 7:39 a.m. today and it exploded within minutes, the South Korean Defense Ministry said in Seoul. North Korea’s state media confirmed the launch failed.

“Any negative impact on the South Korean market will be limited and short-lived as this event is all-too-familiar on the Korean peninsula,” said Kwon Young Sun, a Hong Kong-based economist at Nomura Holdings Inc. “We expect South Korean policy makers to do whatever it takes to stabilize any market volatility.”

Japan Finance Minister Jun Azumi said markets were responding calmly and his government will consider whether more action against North Korea is needed.

Officials from South Korea’s finance ministry, central bank and regulator will meet at 3 p.m. on April 15 to review the nation’s economy and financial markets after the launch, the finance ministry said in an e-mailed statement today.

Growth Forecasts

“Given the past provocations by North Korea, our financial markets tended to recover from a shock in three days to seven days, ” BOK Governor Kim told reporters in Seoul. “We’re watching and analyzing the markets closely.”

Tension over the North’s action comes as policy makers in Asia grapple with any fallout from the European debt crisis, the state of the U.S. economy and higher fuel costs.

Crude oil has risen about 20 percent the past six months, forcing Asian governments to raise fuel prices and limiting policy options for central banks in the world’s fastest growing region. Developing Asia can refrain from further monetary and fiscal stimulus because expansion will remain robust, while spikes in energy costs can revive the threat of inflation, the Asian Development Bank said in a report on April 11.

“One of our biggest concerns is that people’s inflation expectations have not been lowered significantly,” Kim said. “We need to continue our efforts to keep down expectations.”

Signs of Recovery

Asia excluding Japan will expand 6.9 percent this year from 7.2 percent in 2011, the Manila-based lender forecast in its Asian Development Outlook 2012 report. That’s lower than its September forecast of 7.5 percent. Growth will accelerate to 7.3 percent in 2013, the fastest pace in three years, it said.

Asia’s fourth-largest economy, which grew at the slowest pace in two years in the three months ended in December, may have bottomed before beginning to recover this quarter, Finance Minister Bahk Jae Wan said on April. 4. Samsung Electronics Co., Asia’s largest consumer-electronics maker, posted record operating profit in the quarter through March.

“Our economy and financial markets are more stable than several months ago,” Kim said today. “Our monetary policy can pay more attention to inflation if global financial markets are stabilized further.”

The central bank and government forecast 3.7 percent growth this year after a 3.6 percent gain last year. The Bank of Korea will revise its December estimates on April 16. Overseas shipments, equivalent to half of the economy, slid 1.4 percent last month from a year earlier while inflation moderated to a 20-month low of 2.6 percent in March.

Geopolitical Risks

“The pace of global economic recovery will be moderate,” the BOK said. “Risk factors still exist, including the sovereign debt problems in Europe and geopolitical risks in the Middle East.”

Moody’s Investors Service raised South Korea’s credit rating outlook to positive from stable on April 2, citing “very strong and improving fiscal fundamentals.” The rating remains at A1, the company’s fifth-highest grade.

Geopolitical factors and event risks associated with the missile launch are already accounted for in Moody’s rating methodology and positive outlook on South Korea’s A1 rating, said Tom Byrne, senior vice president at Moody’s Investors Service in Singapore.

New Board

South Korea’s finance ministry today recommended Chung Hae Bang, a former official at the Ministry of Planning and Budget and professor at Konkuk University, as a new board member at the central bank’s policy-setting committee, according to an e- mailed statement from the ministry. Chung will replace Kang Myung Hun whose four-year term ends on April 20.

Separately, the nation’s financial regulator recommended Ha Sung Keun, professor emeritus at Yonsei University, to replace Choi Do Soung as a board member. The Bank of Korea recommended Seoul National University professor Moon Woo Sik to succeed Kim Dae Sik. The Korea Chamber of Commerce and Industry said it recommended former Hyundai Motor Co. President Chung Soon Won to fill a seat that has been empty since April 2010.

All four candidates are subject to President Lee’s approval, according to the central bank’s law.

To contact the reporter on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net; Seonjin Cha in Seoul at scha2@bloomberg.net

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


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