The Bank of Korea will tomorrow debate raising borrowing costs for the third time since the global financial crisis after President Lee Myung Bak called for a “war” against inflation.
Analysts are split on whether the central bank will add to increases of 0.25 percentage point in each of July and November from a record-low 2 percent. Four of 10 economists surveyed by Bloomberg News predict a quarter percentage-point move to 2.75 percent, with the rest projecting no change. The decision is due after 9.30 a.m. in Seoul tomorrow.
The benchmark rate has lagged behind the pace of inflation for a record 14 straight months, skewing incentives toward spending and prompting the central bank to say it’s alert to the risk of imbalances from “accommodative policy.” Lee aims to contain consumer-price growth at 3 percent this year, a level exceeded in each of the last four months of 2010.
“We see an increasing risk that the BOK may be forced to hike in January due to public anger over inflation,” said Kwon Young Sun, an economist at Nomura Holdings Inc. in Hong Kong. “There’s rising criticism that the BOK has been far behind the curve,” he said.
The won fell 0.1 percent to close at 1,125.13 per dollar in Seoul yesterday, while the Kospi share index gained 0.4 percent, according to data compiled by Bloomberg. The yield on the 4 percent note due September 2015 rose 2 basis points to 4.29 percent as of 3:03 p.m. in Seoul yesterday, according to the Korea Stock Exchange. It reached 4.3 percent at the close of last week, the highest level since August.
Jobless Rate
The nation’s unemployment rate unexpectedly increased from a six-month low as economic expansion encouraged more people to seek jobs and the number of employees at shops, restaurants and hotels declined.
The jobless rate rose to 3.6 percent in December from 3.2 percent in November, Statistics Korea said in Gwacheon, south of Seoul, today. The median forecast in a Bloomberg News survey of eight economists was for a rate of 3.2 percent.
Finance Minister Yoon Jeung Hyun said today that the nation’s housing sales have started to rebound and rising rental prices are a concern. Yoon also said at a ministerial meeting in Gwacheon that the government will come up with measures to stabilize rental costs.
Capital Inflows
Foreign capital inflows seeking higher yields have contributed to a 6.8 percent appreciation in the won in the past six months. Further gains may hurt export growth, which boosted earnings last year at companies including Hyundai Motor Co., South Korea’s largest automaker.
The nation has joined counterparts from Taiwan to Brazil in taking steps to counter the influx. The government has revived taxes on overseas investment in government bonds, tightened oversight of foreign-currency derivatives and proposed a levy on foreign-exchange borrowings by banks to curb currency swings.
Consumer-price growth accelerated to 3.5 percent in December from a year earlier, from 3.3 percent in November, while producer-price inflation climbed to a two-year high of 5.3 percent.
Monetary policy will focus on price stability this year, the central bank said last week. The inflation target will be 2 percent to 4 percent for 2010 through 2012, and the bank will aim for the range’s midpoint in the “medium-term,” it said.
‘Out of Control’
“Inflation should be contained at 3 percent,” President Lee said last week. “Otherwise, it will directly hurt low- income earners.”
The government is due to announce this week additional measures to restrain inflationary pressures. The finance ministry said yesterday it plans to boost food supply to limit price gains, as demand is set to increase ahead of the Lunar New Year holiday in February.
“Inflation may get out of control if the central bank doesn’t raise rates,” said Lee Sung Kwon, an economist at Shinhan Investment Corp. in Seoul. Consumer-price growth may peak at 3.7 percent in the first quarter, driven by oil and food prices, he said.
The central bank forecasts 4.5 percent economic expansion in 2011, slowing from 6.1 percent last year. The monetary authority predicts inflation will accelerate to 3.5 percent this year from 2.9 percent in 2010.
To contact the reporters on this story: William Sim in Seoul at wsim2@bloomberg.net; Sarina Yoo in Seoul
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