The Bank of Korea will probably keep the benchmark interest rate unchanged at a record low for a seventh month as it gauges an economy showing signs of recovery.
The central bank will maintain the seven-day repurchase rate at 2 percent, according to all 16 economists surveyed by Bloomberg. Governor Lee Seong Tae and his board meet at 9 a.m. in Seoul today and a decision is usually announced before 11 a.m.
The government warned this week South Koreas economy risks sliding into a double-dip recession if stimulus policies are withdrawn too soon. Gross domestic product expanded at the fastest pace in almost six years in the second quarter, as the nation leads a regional rebound with China and Singapore.
The central bank will have to keep rates unchanged for the time being, until there are more visible signs the recovery is strong enough, said Chun Chong Woo, an economist at Samsung Securities Co. in Seoul. It needs to monitor the economy for longer before it gains the confidence to move rates upwards.
South Koreas industrial production rose for a seventh consecutive month in July, climbing 2 percent from June, while manufacturers confidence rose to the highest level in 22 months, earlier reports showed. Consumer confidence climbed to the highest level in almost seven years in August.
The Kospi index has gained more than 40 percent this year as investors bet on South Koreas economic rebound, while the nations credit-rating outlook was raised to stable from negative by Fitch Ratings on September 2, citing the resilience of the country’s economy and banks.
South Koreas state-run Korea Development Institute this week raised its GDP estimate and Credit Suisse Group AG said the economy may grow 0.2 percent this year, avoiding a previously forecast contraction.
Some economists say the central bank may need to raise rates before inflation accelerates.
The strong second-quarter GDP and pick up in Korean equity and house prices has fuelled market speculation that the BOK will be one of the first in Asia to hike rates, with the strong chance of a move before the year ends, Mark Williams and Kevin Grice of Capital Economics Ltd in London said in a note.
They expect the Bank of Korea to raise rates in the second quarter of 2010.
South Koreas government allocated extra funds and frontloaded spending in the budget to help cushion the economy from the global financial crisis.
The Bank of Korea cut the benchmark interest rate by 3.25 percentage points between October and February, the most aggressive easing since the bank began setting a policy rate a decade ago.
Low interest rates have fueled consumer borrowing, with South Koreas bank lending to households expanding for a seventh straight month in August on demand for mortgages and as consumer confidence rose. Loans to households climbed 3 trillion won ($2.4 billion) to 405.1 trillion won, the Bank of Korea said yesterday.
South Koreas aggregated household debt is at a record high relative to disposable income and the highest in Asia and comparable to the US and Australia, according to Nomura International Ltd
This is worrisome to some observers, given that many countries with high and rapidly rising consumer indebtedness have experienced house price bubbles that have subsequently burst, triggering financial crises, said Kwon Young Sun, Nomura economist in Hong Kong. Kwon said he doesn?t see house prices as being significantly overvalued in South Korea.
The nation may tighten capital and debt-to-equity requirements at financial companies after bad loans surged last year, weakening their capital positions, the nations financial regulator said on September 7.
Still, the government has said it wants to maintain policies to support the economy.
A premature shift in the policy trend will pose the danger of putting the economy into a double dip by interrupting an economic recovery, while an excessive delay in the policy shift will spur a bubble in inflation and asset prices, the finance ministry said in a report on September 8.
There’s a need to maintain the expansionary macroeconomic policy trend until an economic recovery is more visible, it said.