South Korean Producer Prices Fall, Household Lending Climbs

By Sungwoo Park and Bomi Lim

Dec. 9 (Bloomberg) -- South Korea’s producer prices dropped for a seventh straight month in November and bank lending to households rose, highlighting the difficulty policy makers face on when to raise interest rates.

Prices paid to producers fell 0.4 percent from a year earlier, after a 3.1 percent decline in October, as a stronger currency reduced the cost of imported materials used to manufacture goods, the Bank of Korea said today. Bank lending to households rose for a second consecutive month in November on increased mortgage loans, the bank said in a separate statement.

Central bank Governor Lee Seong Tae kept the benchmark rate at a record-low 2 percent for a ninth month in November, and the board meets tomorrow for its monthly review of borrowing costs. The economy expanded 3.2 percent in the third quarter, boosted by exports plus local spending, and Goldman Sachs Group Inc. expects the Bank of Korea will increase the key rate by 75 basis points in 2010, and another 50 basis points in 2011.

“The global economic recovery will be led by developing nations,” Goohoon Kwon, an economist at Goldman Sachs, told a briefing in Seoul today where he announced the rates forecast. “Korean exporters are really well positioned because of their large exposure to emerging markets.”

South Korea’s exports rose for the first time in 13 months in November as demand for the nation’s semiconductors, display panels and auto components increased.

Stocks, Currency

The benchmark Kospi stock index has climbed 45 percent this year and sales at the nation’s main department stores gained the most in 14 months in October. The Korean won has risen 24 percent in the past year against the U.S. dollar, making it the best-performing currency in the region.

Loans to households climbed 2.6 trillion won ($2.2 billion) last month to 408.2 trillion won, the Bank of Korea said today. Mortgage lending increased by 1.6 trillion won.

“Household credit is a potential risk factor that the central bank should remain concerned about in general terms,” said Lee Sung Kwon, an economist at Good Morning Shinhan Securities Co. in Seoul. “But the growth rate in November does not appear to be a critical factor in triggering adjustments to the benchmark rate in the near term.”

Loans to companies climbed 2.2 trillion won to 517.8 trillion won, today’s report showed. The broadest measure of money supply, M2, grew 10.5 percent in October from a year earlier, the central bank said today in a separate statement.

South Korea’s economy will expand next year at 4.5 percent, the International Monetary Fund said yesterday. Even so, the nation will maintain accommodative policies to generate jobs and investment as the economy faces uncertainties, the Finance Ministry said last week. Governor Lee said Nov. 12 the central bank will maintain an accommodative policy stance for the time being with an emphasis on sustaining economic activity.

Prices for industrial goods, which include products ranging from textiles to oil, plastics and computers fell 1.2 percent from a year earlier, today’s report showed.

Electricity, water and gas prices advanced 6.7 percent, while services costs rose 0.6 percent, according to the report. The cost of agricultural, forestry and fisheries products declined 2.3 percent.

To contact the reporter on this story: Sungwoo Park in Seoul at spark47@bloomberg.net; Bomi Lim in Seoul at blim30@bloomberg.net