By William Sim
Sept. 11 (Bloomberg) -- The Bank of Korea will probably keep interest rates unchanged today as policy makers await evidence last month's increase is enough to quell inflation that is running close to the fastest pace in 10 years.
Governor Lee Seong Tae and his six colleagues will leave the seven-day repurchase rate at 5.25 percent, according to all 23 economists surveyed by Bloomberg News. Lee raised the rate to an eight-year high in August, the first increase in 12 months, ``to keep inflation expectations from spreading.''
Oil prices fell, consumer prices gained at a slower pace in August, industrial production declined in July and retail-sales growth eased, giving Lee scope to stand pat this month. Still, the won's 8 percent drop against the dollar since the Aug. 7 rate increase has complicated the bank's decision by fanning inflation pressures as it drives up the cost of imported goods.
``Another rate hike seems unlikely this year as oil prices are falling and the economy is slowing,'' said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul, who expects a rate cut by early next year. ``The falling won is a concern, but slowing growth is a bigger concern.''
The bank's decision is due before 11 a.m. in Seoul.
Policy makers will focus on supporting economic growth once inflation moderates, Governor Lee told lawmakers on Sept. 4.
The won has slumped 15 percent this year, Asia's worst- performing currency, as investors sold Korean stocks and bonds because of the dimming outlook for economic growth combined with concern about the nation's swelling external debt.
Stocks, Won
The Kospi index of stocks fell 0.1 percent to 1,463.70 at 09:29 a.m. in Seoul, taking this year's drop to 23 percent. The won declined 0.3 percent to 1,098.50 against the dollar. The yield on the five-year government bond slipped 2 basis points to 5.75 percent.
The speed of the won and stock-market declines sparked speculation that South Korea is headed for a repeat of 1997, when the currency lost half of its value and government was forced to turn to the International Monetary Fund for a $57 billion bailout to help companies repay debt. President Lee Myung Bak said on Sept. 9 such a crisis ``will never happen.''
UBS AG last week forecast the Bank of Korea will increase rates again in 2008 to support the won and restrain inflation.
Goldman Sachs Group Inc. this month revised its forecast to a rate increase either at today's meeting or in October, after earlier expecting no change. Each 8 percent drop in the won adds 1.6 percentage points to South Korea's inflation rate, according to Goldman economist Kwon Goohoon in Seoul.
Stability At Stake
``The won sell-off has been so huge that macro stability is at stake,'' Kwon said. ``If the central bank raises rates again, it sends a positive signal.''
Consumer prices rose 5.6 percent in August from a year earlier. While that's a moderation from July's 10-year high of 5.9 percent, it still marked the 10th consecutive breach of the central bank's 2.5 percent to 3.5 percent inflation target.
Fifteen of 20 economists surveyed expect rates will be kept unchanged for the rest of 2008 because higher borrowing costs would stifle an already-slowing economy as consumers, struggling with record debt levels, cut spending. Four analysts expect another rate increase and one a rate cut.
The economy expanded 4.8 percent in the second quarter from a year earlier, the weakest pace in more than a year. Household spending fell for the first time in four years last quarter.
``Korea's heavily indebted households would feel the pinch from higher debt-servicing costs,'' said Kwon Young Sun, an economist at Lehman Brothers Holdings Inc., who expects 25 basis point rate cuts in May, July and September 2009.
``The Korean financial system is now, in our view, more vulnerable to domestic shocks such as monetary tightening than external shocks.''
The following table shows forecasts for today's decision and for rates by the second half of this year and the first half of 2009:
-------------------------------------------------------------- Sept. 2nd-Half 1st-Half 2008 2008 2009 ------------------------------------------------------------ Median 5.25% 5.25% 5.00% Average 5.25% 5.31% 5.00% High Forecast 5.25% 6.00% 5.50% Low Forecast 5.25% 5.00% 4.50% Number of Participants 23 20 19 Previous 5.25% ------------------------------------------------------------ Capital Economics 5.25% --- --- CFC Seymour 5.25% 6.00% 5.00% Citi 5.25% 5.25% 5.25% CJ Investment & Securities 5.25% 5.25% 5.00% Credit Suisse 5.25% 5.25% 5.00% Daewoo Securities 5.25% 5.25% 4.75% DBS Group 5.25% 5.25% 5.25% Forecast Pte 5.25% --- --- Goldman Sachs Group 5.25% --- --- Good Morning Shinhan Secs 5.25% 5.25% 5.50% Hana Daetoo Securities 5.25% 5.25% 5.25% HMC Investment Securities 5.25% 5.50% --- HSBC 5.25% 5.25% 5.00% Hyundai Securities 5.25% 5.25% 4.75% JPMorgan Chase 5.25% --- --- Lehman Brothers 5.25% 5.00% 4.50% Mirae Asset Securities 5.25% 5.50% 5.50% Moody's Economy.com 5.25% 5.25% 4.50% Samsung Economic Research In 5.25% 5.25% 5.25% Samsung Securities 5.25% 5.25% 5.25% SC First Bank 5.25% 5.25% 4.75% Shinhan Bank 5.25% 5.25% 5.00% Thomson IFR 5.25% 5.25% 5.00% UBS Securities --- 5.50% 4.50% ============================================================
To contact the reporter on this story: William Sim in Seoul at wsim2@bloomberg.net
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