Prediction split on key rate setting

Analysts’ views were mixed on the prospect of an interest rate hike ahead of the monetary policy committee’s monthly meeting for benchmark interest rate-setting slated for Friday. This reflects the Bank of Korea’s dilemma of containing rising prices while keeping growth on track.

Inflation driven by fresh food prices and commodities abroad is pressuring the central bank to raise the key rate for the second month in a row. The rate currently stands at the 2.75 percent level.

The Korean won, under pressure to appreciate, hovered at the 1,100 level against the U.S. dollar Wednesday. And some analysts said a further rate lifting could hurt exporters by bringing about the currency’s rapid appreciation.

A majority, 75.9 percent, among a pool of 220 bond traders surveyed by the Korea Financial Investment Association said they expect the BOK to leave its base rate unchanged.

“BOK governor Kim Choong-soo’s recent worrisome comment on inflationary pressure is raising expectations of another raise but given that we already had a rate hike in January, the central bank may pace the rate setting,” the industry body said, interpreting the result.

“Uncertainty in the global market and the S&P’s downgrade of Japan may prompt the central bank to keep the rate frozen,” it said.

The BOK unexpectedly raised the seven-day repurchase rate by 25 basis points on Jan. 13 in an effort to contain prices. The government announced a package of anti-inflationary measures on the same day. It raised the borrowing costs three times to pace the rising prices with the fast economic recovery.

Meanwhile Hyundai Securities, expecting a hike of 25 basis points, said the central bank is likely to support the government’s all-out efforts to contain inflation.

“The benchmark interest rate should be raised because the current rate of 2.75 percent does not reflect the active growth momentum,” Lee Sang-jae, an economist at Hyundai Securities told The Korea Herald.

“If we follow the money, we notice that investors have been selling off their short-term bonds in anticipation of a rate hike in the past week. The market is betting for a raise because they feel the economy somewhat heated under the inflationary pressure.”

The Korea Treasury Bond, which continued to see an outflow of funds for a third month, declined at the fastest rate for the past two months. Yield on three-year bonds, which move inversely to prices, rose above four percent level this week after growing over 40 percent from the 2.8 percent level in the first week of December.

Bond yields tend to increase under the inflationary pressure or signs of fast economic growth, as they prompt benchmark interest rate to rise. A rate hike devalues the existing bonds issued at lower rates.

Samsung Asset Management Co., the country’s largest bond-fund manager, on Tuesday said it is reducing the holdings of short-term government debt and buying more longer-term notes.

“Short-term debt is hit most when interest rates begin to rise and you’d better stay away from it.”

“Our central bank may raise the base rate as much as possible in the first half and up to 3.5 percent or even higher this year,” Chief Investment Officer Eugine Kim said in an interview.

Samsung Securities said while a raise is a possibility, keeping it frozen for another month could be more legitimate given the uncertainties here and abroad.

“For the central bank to make another raise after January’s move, it would be going against the government’s will to keep the won competitive and some of the advanced economies under austerity budgets,” it said in a report.

Nine of 12 economists surveyed by Bloomberg expected the BOK to raise the interest rate to 3 percent Friday.

By Cynthia J. Kim (cynthiak@heraldcorp.com)