Bank of Korea Can Use Non-Rate Tools as Prices Rise, Yoon Says

By Shamim Adam and Francine Lacqua

Oct. 5 (Bloomberg) -- South Korea still needs expansionary economic policy and the central bank has other tools available before raising interest rates if it decides it needs to contain rising asset prices, Finance Minister Yoon Jeung Hyun said.

Any winding back of fiscal stimulus by the government or interest-rate increases from the Bank of Korea would be “premature” because the economy still faces uncertainties, Yoon said in an Oct. 3 interview in Istanbul, where he is attending the annual meetings of the World Bank and the International Monetary Fund.

Leaders from the Group of 20 nations last month pledged to preserve the global economic recovery and wait to pull back emergency government assistance until “the time is right.” South Korea’s government allocated extra spending and frontloaded the budget earlier this year in response to the crisis, while the central bank cut interest rates to a record low.

“This is not the time to implement exit strategies because there are many obstacles to overcome to reach a robust recovery,” Yoon, 63, said. “Private sector demand and investment hasn’t yet recovered fully because of the global crisis in the past year. We have some way to go.’

Central bank Governor Lee Seong Tae last month signaled borrowing costs may be raised to stem rising property prices and mortgage lending. The central bank kept its key rate unchanged at 2 percent for a seventh month on Sept. 10. Policy makers next meet on Oct. 9.

South Korea’s inflation rate was 2.2 percent in September, remaining below the central bank’s target of between 2.5 percent and 3.5 percent for a fourth month.

“We don’t have problems with inflation,” Yoon said.

Asset Prices

The decline in borrowing costs has fueled consumer credit, with bank lending to households expanding for a seventh straight month in August, led by demand for mortgages. Home prices climbed for a fifth month in August.

Asset prices are on a course to “normalize” after hitting a bottom during the financial crisis, Yoon said, adding that the gains are “not a serious” problem.

“For South Korea, the central bank has a lot of tools before raising the interest rate” if it chooses to unwind loose monetary policy, Yoon said. “The interest rate is decided by the Bank of Korea and we believe they will judge it wisely and consider every index comprehensively.”

President Lee Myung Bak said Sept. 30 the government needs to continue its expansionary fiscal policy until signs of an economic recovery are stronger. The government on Sept. 28 announced a proposal to increase next year’s spending by 2.5 percent to help sustain economic growth.

‘Cautiously Optimistic’

South Korea is one of the fastest nations in the region to recover from the crisis as the economy expanded 2.6 percent in the second quarter, the quickest pace since 2003. The International Monetary Fund on Oct. 1 raised its economic growth forecast for South Korea, saying the economy will contract 1 percent this year, less than previously anticipated.

“We are cautious and cautiously optimistic because we still have many uncertainties in the economic sector,” Yoon said. “We still need expansionary macroeconomic policies.”

Exports fell at the slowest pace in 11 months in September, helped by increased overseas sales of cars and semiconductors, while manufacturers’ confidence was at a two- year high.

Gains in the won, Asia’s best-performing currency against the dollar last quarter, boosted concern the government will intervene to minimize the impact of a stronger exchange rate on exporters. It climbed more than 8 percent in the three months ended September and reached the strongest in a year on Oct. 1.

Smooth Volatility

The currency appreciation is not hurting the nation’s exports and the government will take steps to smooth exchange- rate volatility and guard against speculative trades, Yoon said.

The government will use market operations to smooth any volatility in the currency, similar to policy makers in other countries, “particularly if there are signs of speculation,” Yoon said.

“Korea’s exports situation is much better than other countries,” he said. “The exchange rate hasn’t impeded exports because of the quality of products and marketing. We respect the market’s view” on what the level of the currency should be.

To contact the reporters on this story: Shamim Adam in Istanbul at sadam2@bloomberg.net; Seyoon Kim in Seoul at skim7@bloomberg.net