The Bank of Korea may increase its benchmark interest rate to damp price pressures even as the risk of faltering world growth dims the nation's export outlook.
Ten of 14 economists surveyed by Bloomberg News predict Governor Kim Choong Soo will raise the seven-day repurchase rate 0.25 percentage point to 2.5 percent tomorrow. The rest expect no change after July's quarter-point increase from a record-low 2 percent, the first advance since the global financial crisis.
Export gains propelled South Korea's economy to the fastest first-half expansion in a decade, fuelling price pressures. July's rate increase may be insufficient to limit inflation, even as the risk of another US recession remains one of the "biggest" concerns for monetary policy, Kim said recently.
"The BOK will act so as not to get behind the curve and will frontload policy rate hikes in the remainder of 2010," said Sukhy Ubhi, an economist at Capital Economics Ltd in London. Still, there remains a "significant chance" the central bank will pause due to global economic risks, Ubhi said.
The benchmark Kospi share index declined 0.3 percent to 1,787.74 yesterday. The won fell 0.5 percent to 1,176.7 per dollar on speculation of central bank intervention to curb appreciation that may hurt exports, which are equivalent to about half the economy.
The currency has fallen about 1.1 percent since the start of the year, one of Asia's worst performers, boosting export earnings at companies from Samsung Electronics Co., Asia's biggest maker of semiconductors, flat screens and mobile phones, to Hyundai Motor Co., South Korea's largest automaker.
Trade Surplus
Industrial production expanded for the 13th straight month in July, while exports grew for the 10th month and consumer prices rose 2.6 percent in August, data showed last week.
The trade surplus will reach $32 billion in 2010, up from an earlier estimate of $20 billion, the Ministry of Knowledge Economy said September 1. The economy expanded 7.6 percent in the first half and will grow 5.9 percent in 2010, according to the Bank of Korea.
The monetary authority's inflation target is 2 percent to 4 percent on average through 2012. The government is increasing power and gas prices over August and September, which may add about 0.1 percentage point to inflation, the finance ministry said in July.
South Korea's economic recovery is strong and the country still has room to raise borrowing costs, the International Monetary Fund said last week. "The neutral interest rate, which would be the rate at which you support employment and activity without creating inflation" may be around 4 percent, said Subir Lall, mission chief to South Korea at the IMF.
US Slowdown
Japan's and Australia's central banks signaled yesterday that the outlook for US growth is deteriorating, making it tougher for them to set monetary policy.
The Reserve Bank of Australia extended a pause in raising interest rates "for the time being," even after the nation's gross domestic product rose the most since 2007.
The Bank of Japan said it's prepared to add more monetary stimulus after last week's emergency decision to expand a credit programme following a tumble in the dollar against the yen.
Both banks singled out the US, with the RBA saying growth there looked "weaker" in the second half, and the BOJ citing "uncertainty about the future, especially for the US"
http://www.bloomberg.com/news/2010-09-07/bank-of-korea-poised-to-raise-interest-rates-even-as-global-outlook-sours.html
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