Bank of Korea Says Rate Increases Can Be More Than ‘Baby Step’

By Seyoon Kim

Oct. 16 (Bloomberg) -- Bank of Korea Governor Lee Seong Tae said any future increase in the benchmark interest rate can be bigger than the bank’s usual 25 basis points, indicating he may raise rates at a faster pace in the coming months.

“It’s difficult to say the increase will be by 0.25 percentage point each time” as was the case in the past, Lee told lawmakers yesterday at the annual audit of the central bank in Seoul. “The central bank will review economic conditions” before deciding how much it will raise rates, he said. “I think it’ll be different from the usual baby step.”

The central bank last week kept the benchmark interest rate unchanged at a record-low 2 percent and signaled it may leave borrowing costs on hold as home loans slow. Lee’s comment came after the bank said earlier yesterday it plans to maintain an “accommodative” monetary policy as it gauges the nation’s jobs market and the global recovery.

The bank cut the benchmark interest rate by 3.25 percentage points from October to February, the most aggressive easing since it began setting a policy rate a decade ago. The government also increased spending this year to help cushion the economy from the global recession.

“If we divide and raise rates by a small amount, it will take too much time while at the same time, if we do it in a short time, it may be too big a shock,” Lee said yesterday.

When asked whether his comments referred to possible rate increases of more than half a percentage point at one time, Lee said it will be “difficult” to do that.

Loans Surge

Low interest rates have spurred consumer borrowing, with bank lending to households expanding for a seventh straight month in August before falling in September. Loans to households climbed 3 trillion won ($2.6 billion) to 405.1 trillion won in August and fell 1 trillion won in September.

Lee in September indicated the bank may act to stem rising property prices and mortgage lending, triggering speculation that interest rates would increase. A slowdown in property price increases and the appreciation of the won prompted the bank to leave rates unchanged last week, Lee said yesterday. The currency has gained more than 9 percent against the dollar in the past three months.

Still, Lee said earlier yesterday the reduction in borrowing costs to 2 percent was designed to counter an emergency and would be “too low” for a normal slowdown.

“The remaining issue is whether we adjust rates after seeing clear signs of an economic recovery from the crisis, or whether we can adjust rates once we judge that we’ve exited a severe crisis,” Lee told lawmakers.

Double Dip

He ruled out the possibility of the economy facing a so- called double-dip recession.

South Korea’s economy expanded 2.6 percent in the second quarter, the fastest pace in almost six years, and the benchmark Kospi stock index has risen more than 47 percent this year on expectations of an economic recovery. Exports fell at the slowest pace in 11 months in September while manufacturers’ confidence climbed to the highest level in two years.

Both Lee and Finance Minister Yoon Jeung Hyun said that gross domestic product will probably shrink by less than 1 percent in 2009. That compares with an earlier government estimate of a 1.5 percent contraction this year and the central bank’s forecast of a 1.6 percent decline. Lee expects the economy to expand about 3 percent to 4 percent in 2010.

BNP Paribas SA said in a report earlier this month that the central bank will probably raise rates this year.

“A move as early as November or certainly by December looks likely,” Richard Iley, Hong Kong-based chief economist at BNP, wrote in a note. “At 2 percent, policy rates are set for an emergency that has now passed and are unnecessarily fuelling incipient asset-price bubbles.”

The central bank said yesterday it will “closely monitor” asset prices, capital flows in the financial market and the foreign-currency liquidity status.

To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net