BOK Holds Rate at Seven-Year High to Fight Inflation
The Bank of Korea kept interest rates at the highest level in seven years, saying the risk of faster inflation outweighs concern that economic growth is slowing.
Governor Lee Seong Tae and his colleagues left the seven-day repurchase rate at 5 percent in Seoul today, as forecast by all 19 economists surveyed by Bloomberg News. They last adjusted the benchmark in August with a quarter-point increase.
Surging oil and food prices are driving inflation above the comfort zones of central banks globally, replacing slowing economic growth as their primary concern. Easing the rising cost of living is a priority for President Lee Myung Bak, whose popularity has plunged since his government agreed to resume U.S. beef imports that protesters claim aren't safe from disease.
“President Lee has set tackling inflation as a top priority to win back public support,'' said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul. “The central bank will have to raise rates if inflationary expectations spread.''
The yield on the five-year government bond fell 2 basis points to 5.84 percent at 12:53 p.m. in Seoul after Governor Lee spoke at a press conference, cooling speculation that the bank may increase interest rates. It earlier rose as much as 8 basis points.
Governor Lee said economic growth would probably slow gradually and inflation would accelerate and added that monetary policy depends on whether exports remain strong, domestic demand cools and inflation quickens.
`Cut or Increase'
“The rate policy is always open for a rate cut or increase as we manage it every month by looking into the economy and inflation,'' the governor said. “Inflation may return to the normal level after it's absorbed in the economy.''
The five year bond yield rose as high as 5.94 percent after the bank distributed a Korean-language statement immediately following the decision that said: “The upward risk to inflation is bigger than the downside risk to growth.''
The statement also said: “It's necessary to manage economic policy to keep inflation expectations from spreading.''
“There was no clear statement from the governor that could be taken to mean that the central bank will raise rates anytime soon,'' said Seo Chul Soo, a fixed-income strategist with Daewoo Securities Co faxless payday advance. in Seoul. “His comments were less hawkish than the market feared.''
The won traded at 1,030.35 versus the dollar from 1,030.10 late yesterday.
Oil Prices
“Difficulties are spreading in the overall economy,'' Finance Minister Kang Man Soo said today, citing the increase in oil prices. “Because the oil-price rise continues, I think difficulties could increase in coming months.''
Central banks in India, Russia, Brazil, Indonesia, the Philippines, Vietnam and Pakistan have all boosted borrowing costs in the past month. China this week ordered lenders to set aside more reserves.
Soaring fuel and food costs drove consumer prices to a seven-year high of 4.9 percent in May, exceeding the central bank's target range for a seventh month. The bank aims to keep inflation between 2.5 percent and 3.5 percent, on average, for the three years to 2009.
The drop in the won against the U.S. dollar this year is another factor that is pushing inflation higher by increasing the cost of imports.
At the same time, a weaker won is helping Asia's fourth- largest economy withstand a slowdown in the U.S. and Europe by making Samsung Electronics Co.'s mobile phones and Hyundai Motor Co.'s cars cheaper overseas.
Economic Growth
The focus of policy makers may shift back to supporting growth should oil prices fall and inflation begin to cool.
South Korea's $970 billion economy grew at the slowest pace in more than a year last quarter as consumers and businesses cut spending.
South Korean households were the most pessimistic in more than three years in May. Their debt rose to a record last quarter as they borrowed to buy houses and settle credit-card bills.
The ability of households to repay debt has weakened, the central bank said last month, because their debt rose faster than their income.