Bank of Korea May Keep Rate Steady at Eight-Year High

By William Sim

Oct. 9 (Bloomberg) -- The Bank of Korea may keep interest rates unchanged at an eight-year high today, declining to follow central banks from China to Europe that cut their benchmarks yesterday in response to the deepening financial meltdown.

Governor Lee Seong Tae and his board will leave the seven- day repurchase rate at 5.25 percent in Seoul, according to all 18 economists surveyed by Bloomberg News earlier this week. The Kospi index dropped 32 percent this year and the won has tumbled to the lowest since the Asian financial crisis a decade ago.

``The Bank of Korea will likely wait to cut rates until the foreign-exchange market stabilizes, despite the global rate cut yesterday,'' said Seo Chul Soo, a fixed-income analyst at Daewoo Securities Co. in Seoul, who now expects three rate cuts over the next three months after earlier forecasting moves by the first half of 2009.

The Federal Reserve, European Central Bank and four other central banks jointly lowered borrowing costs yesterday in an unprecedented, emergency coordinated bid to ease the economic effects of the financial crisis and China separately cut its key rate. All but one economist in the Bloomberg survey forecast a Korean rate cut by the first half of next year.

Lee, who raised South Korea's benchmark rate in August, may wait before following the global easing in monetary policy until he's more confident inflation is abating. The won's decline is boosting imports costs, adding to inflation pressures even as commodity prices drop.

`Better to Wait'

``This isn't a good time for a rate cut as it could fan inflation and drive the won down further,'' said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul. ``It's better for the central bank to wait until inflation eases and global financial markets stabilize before making its next move.''

Finance Minister Kang Man Soo said this week that the government's priority is to stabilize the currency. Policy makers have spent billions of dollars of foreign reserves to try to limit the won's drop, Asia's worst performer this year.

The won sank 4.8 percent yesterday to the lowest since 1998 as a seizure in global credit markets forced banks and companies to sell the currency to meet dollar financing requirements.

South Korea has been building up its currency reserves since the Asian financial crisis led to the won halving in value in 1997 and sent the nation to the brink of default. The government needed a $57 billion bailout from the International Monetary Fund to help repay overseas debt.

The nation's foreign reserves, the world's sixth-biggest holdings, fell for a fifth month in August to $243.2 billion, according to the Bank of Korea.


The won has tumbled as worsening financial turmoil prompts investors to offload emerging-market assets.

Export Prospects

Offshore demand for Korea's mobile phones, cars and televisions is under threat amid dimming prospects for the nation's major trading partners, China, the U.S. and Europe.

Net exports powered half the economy's 0.8 percent growth in the second quarter as local consumers cut spending for the first time in four years.

``An interest-rate cut is looming amid signs the economy is cooling,'' said Chun Chong Woo, an economist at SC First Bank Korea Ltd. ``Still, the central bank will be cautious about its next move as inflation remains a big concern.''

A falling currency exacerbates inflationary pressure by boosting the cost of imports. Consumer prices rise by 0.08 percentage point for every 1 percent decline in the won annually, according to the Bank of Korea. Core inflation, which strips out oil and food costs, accelerated for a seventh month in September.

Bank Troubles

The global market turbulence has led to a freeze in lending. Banks have collapsed in the U.S., and European governments have been forced to bailout lenders and guarantee consumers' deposits.

Standard & Poor's said this week South Korea's banks face increased difficulties in refinancing loans because of the credit squeeze. Banks' foreign-currency funding was $127 billion as at June 30, double the level at the end of 2005, S&P said.

Kookmin Bank, South Korea's biggest, and rivals Woori Bank, Shinhan Bank and Hana Bank had the outlook for their financial strength ratings changed to ``negative'' from ``stable'' by Moody's Investors Service on Oct. 1.

The Seoul Economic Daily said Oct. 7 that the Bank of Korea may reduce the amount that commercial lenders are required to set aside as reserves. The central bank could also increase lending via repurchase agreements to boost funds in the financial system, the Korean-language newspaper reported, citing an unidentified government official.

The following table shows forecasts for today's interest rate decision, which is expected before 11 a.m. in Seoul, and for rates by the second half of 2008 and the first half of 2009.

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                                 Oct.    2nd-Half  1st-Half
                                 2008      2008      2009
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Median                           5.25%     5.25%     4.75%
Average                          5.25%     5.13%     4.75%
High Forecast                    5.25%     5.25%     5.25%
Low Forecast                     5.25%     4.75%     4.25%
Number of Participants            18        16        16
Previous                         5.25%
--------------------------------------------------------------
Citi                             5.25%     5.25%     5.00%
Daewoo Securities                5.25%     4.75%     4.50%
DBS Group                        5.25%     5.25%     5.25%
Forecast Pte Ltd.                5.25%     5.00%     4.25%
Good Morning Shinhan Securities  5.25%     5.25%     4.75%
Hana Daetoo Securities           5.25%     5.25%     5.00%
HI Investment & Securities       5.25%     5.00%     4.75%
HSBC                             5.25%     5.25%     4.75%
Hyundai Securities               5.25%     5.00%     4.50%
ING Bank                         5.25%     5.00%     5.00%
Mirae Asset Securities           5.25%     5.00%     4.50%
Moody's Economy.com              5.25%     5.00%     4.50%
Morgan Stanley Dean Witter       5.25%      ---       ---
Samsung Securities               5.25%     5.25%     4.75%
SC First Bank                    5.25%     5.25%     4.75%
Shinhan Bank                     5.25%     5.25%     5.00%
Taurus Investment& Securities    5.25%     5.25%     4.75%
UBS Securities                   5.25%      ---       ---
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To contact the reporter on this story: William Sim in Seoul at wsim2@bloomberg.net