Europe debt fears may delay BOK exit plan

By Kang Seung-woo

Staff reporter

The renewed fears of another financial crisis created by the debt turmoil in Europe is likely to make Seoul policymakers more cautious about an exit strategy, further delaying the timing of a rate hike.

Market participants are now paying close attention to Bank of Korea (BOK) Governor Kim Choong-soo and whether he will deliver a hawkish commentary following another rate freeze at the monetary policy committee meeting slated for Wednesday.

Although a rate increase is not forecast to come this month, Kim, known as a dovish governor, has been widely expected to adjust his stance as key economic data are pointing to a fast economic rebound.

The central bank has been trying to ignite a debate over rate hikes to create an atmosphere for moving to halt the credit-easing campaign. In its financial stability report, it stressed the need to carry out its monetary policy in a preemptive manner, saying that the effect of rate increases on the economy will be limited. The BOK froze the key rate for the 14th straight month in April.

However, market volatility caused by the European debt fiasco is overshadowing rising voices for rate hikes from the central bank and global organizations, including the International Monetary Fund (IMF).

The IMF recently said that with the recovery underway, it is appropriate to think about implementing an exit strategy. The nation's economy grew at the fastest pace in more than seven years in the first quarter of the year with gross domestic product (GDP) expanding 7.8 percent from a year earlier.

Industrial output has posted solid growth since last July, rising by 22.1 percent in March from a year ago and business confidence grew to a more than seven-year high for May, with the index of manufacturers' expectations jumping to 107 for May, the highest level since the fourth quarter of 2002.

Stephen Roach, chairman of Morgan Stanley Asia, also said late last month that the BOK needs to increase the rate, saying that the emergency is over.

"There is a risk here that central banks around the world, including the Bank of Korea, are going to be too late in implementing exit strategies. It's inappropriate to leave interest rates at the same emergency level," he said.

The biggest concern for policymakers is worsening market sentiment. The local financial market took a heavy beating over the past few days as foreign investors scrambled for exits, concerned over fears of contagion.

Against this backdrop, it is highly probable that Governor Kim will maintain his earlier stance, stressing lingering uncertainties both at home and abroad. Kim is highly expected to try to avoid any gestures or language that could give the market any inkling about the direction of future monetary policy.

A BOK official said, "Opinions for an early yet gradual rate increase have been growing, but the authorities have to closely monitor the economic uncertainty in and out of Korea."

In addition, most local bond traders look forward to retaining the key interest rate in the monthly monetary policy meeting.

In a recent survey on 221 experts in the bond market, 99.4 percent of them answered that the BOK would keep the rate intact.

However, the fiscal woes are not expected to last long enough to slow Korea from implementing an exit strategy.

"A rate-increase plan has lost a little ground as of late due to Greece's financial problems, but it is not an issue that will linger," said economist Shin Min-young of the LG Economic Research Institute.

"So the key interest rate could be elevated in the third quarter of the year after keeping an eye on the second-quarter record."

Meanwhile, the European Central Bank vowed to keep the bank's key lending rate unchanged at a record low of 1 percent last week.