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BOK may raise rates in March over price pressures

The Bank of Korea may raise borrowing costs again as early as March to counter inflation pressures after unexpectedly leaving policy unchanged Friday.

Governor Kim Choong-soo and his officials held the seven- day repurchase rate at 2.75 percent in a split decision, after economists had forecast a quarter-point increase.

Goldman Sachs Group Inc. and HSBC Holdings Plc say the next move will be next month after inflation breached the central bank’s 4 percent ceiling last month and producer prices jumped the most in two years. President Lee Myung-bak’s government pledged Friday to boost imports of pork and milk powder and review oil pricing in the latest efforts to restrain prices.

“The Bank of Korea still has a long way to go,” Kim Song Yi and Frederic Neumann, economists at HSBC, said Friday, adding that the normalization of monetary policy has “barely begun.” They see the key rate at 3.75 percent by year-end.

The decision was forecast by only three of 12 economists surveyed by Bloomberg News, with the others predicting a quarter-point move after the bank raised rates by that margin in January.

The won fell 1 percent to close at 1,128.47 per dollar in Seoul Friday and touched 1,128.70, the weakest level since Jan. 20. The KOSPI dropped 1.6 percent, finishing below 2,000 for the first time since Dec. 13.

“We will move ahead with normalizing interest rates at a pace that’s not too slow, nor too fast,” Governor Kim said at a press briefing in Seoul.

Korea’s pause contrasts with the People’s Bank of China this week raising interest rates for the third time since mid-October. While Asian policy makers face heightened inflation risks as money flows into the region, Korean officials may still be assessing the effects of last month’s boost to borrowing costs after economic growth cooled in the fourth quarter.

Consumer prices rose 4.1 percent last month from a year earlier and producer prices jumped 6.2 percent. Inflation may stay at about 4 percent for “some time,” Kim said Friday.

While policy makers remain concerned about inflationary pressures, higher borrowing costs could add to the burdens of debt-bearing households, small businesses and low-income earners, he said. Lending to households fell for the first time in 11 months in January.

The Bank of Korea’s decision “failed to stabilize inflation expectations,” said Kwon Young Sun, an economist at Nomura Holdings Inc. in Hong Kong.

Borrowing costs have lagged behind the pace of inflation for 15 straight months, a sign that further rate increases may be warranted. Details of the split among the six members of the monetary-policy board will be disclosed in six weeks’ time, when the minutes of the meeting are released.

“It was a close call, but we thought that it’s more likely for them not to raise this time and pause and signal a hike later in March,” Kwon Goo-hoon, a Seoul-based economist at Goldman Sachs Group Inc., said on Bloomberg Television. He expects the rate to rise to 3.5 percent by the end of this year.

Policy makers will allow gains by the won, along with rate increases, to cool inflation, Kwon said.

The Bank of Korea targets inflation of 2 percent to 4 percent through 2012 and aims for the midpoint of the range in the medium term. Its policy board raised the benchmark rate by a quarter of a percentage point in July, November and January from a record-low 2 percent.

If the Bank of Korea “fails to anchor inflation expectations, foreign investors will question the authorities’ willingness to tackle inflation and may decide to leave the country,” said Kong Dong-rak, a fixed-income analyst at Taurus Investment & Securities Co. in Seoul.

Foreign investors’ net holdings of Korean debt fell for the second straight month in January.

The central bank forecasts a 4.5 percent economic expansion in 2011, slowing from the 6.1 percent pace last year, and predicts inflation will accelerate to 3.5 percent from 2.9 percent. Asia’s fourth-largest economy expanded 0.5 percent in the three months through December from the previous quarter, when it grew 0.7 percent.

Exports, which account for about half of the $833 billion economy, rose 46 percent in January from a year earlier, the most since August 1988. The resurgence in demand has bolstered earnings at companies including Samsung Electronics Co., the world’s second-largest maker of mobile phones. 

(Bloomberg)
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