By Kim Jae-kyoung
The Bank of Korea (BOK) is expected to keep its key rate at the current level of 2.5 percent in December due to lingering uncertainties caused by debt trouble in Europe and China’s tightening policies.
The central bank raised the policy rate in November, the second increase this year, after it froze the rate for three consecutive months, from August to October.
The key point at this month’s monetary policy committee meeting slated for Thursday will be how much weight the BOK will put on the risk of inflation as inflationary pressure has been relatively stable since November.
Most economists said that there is no reason the BOK should make another rate hike at the moment as the economy has shown clear signs of a slowdown. They expect that the renewed fears over a debt crisis in Europe and China’s tightening policies are expected to slow a recovery of the global economy.
“With slowing growth and the twin imbalances of a large current account surplus and high inflation, we expect policymakers to choose a compromise policy mix by implementing modest fiscal consolidation, allowing the won’s appreciation and increasing policy rates slowly,” Nomura Securities economist Kwon Young-sun said in a research note.
Hit by the global economic slowdown, the GDP growth slowed to 0.7 percent in the third quarter from the previous one, the slowest growth in one and a half years. The Industrial Production Index decreased by 4.2 percent in October, the largest drop in 22 months. Manufacturers’ business confidence also fell to the lowest level in 11 months for December.
“The BOK is very strict in sticking to its inflation targeting framework. After the inflation scare of October ― 4.1 percent growth ― the consumer inflation growth actually subsided in November and is expected to be rather stable in December. As such it is a calculated risk to wait a bit before continuing to normalize monetary policy,” Natixis senior economist Silipo Luca told The Korea Times.
The market consensus regarding the future course of the monetary policy is that the BOK will raise the benchmark rate again in the first quarter of next year.
“Although the current inflation rate is within the BOK’s tolerated range, there is a 100 basis point difference between the current rate and the interest rate that would ensure price stability in the medium term in Korea,” Luca said.
“As such we see BOK moving gradually toward this level with a 25 basis point hike possible in February and a further 75 basis point hike up to December 2011,” he added.
Deutsche Bank also expects another rate increase in the first quarter but the central bank will control the pace of credit tightening to avoid possible side effects.
“We expect measured rate hikes over the next 12 months and the next increase to be delivered late in the first quarter, with the won remaining as the downside risk to our rate outlook,” the bank said in its research note.
“We expect the central bank to limit its rate hikes to 75 basis points over the next 12 months due to the indebtedness of households and to support the housing market recovery,” it added.