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S Korea's monetary tightening pace to slow in H2 of 2011

06-13-2011 14:59 BJT

SEOUL, June 13 (Xinhua) -- South Korea's monetary tightening will come at a slower pace in the second half of this year than the first half, analysts at home and abroad said Monday.

"The Bank of Korea (BOK) will continue to hike rates in the second half, but more slowly than in the first half. A 25-basis- point rate hike per quarter will be conducted in the second half," DBS said in a daily report. The BOK raised its benchmark seven-day repo rate by 25 basis points to 3.25 percent at the June rate-setting meeting last week.

The move took some by surprise as external uncertainties are expected to prevent the BOK from lifting the key rate. Market watchers said the BOK resumed its rate normalization process by lifting the rate in June, but the pace of monetary tightening will be slower than in the first half due to lingering external uncertainties such as a soft patch in the U.S. economy and the European fiscal crisis as well as the expected slowing consumer inflation.

DBS noted growth momentum in consumer prices in the second half should be somewhat slower than in the first half as the high base effects will emerge in the fourth quarter given the surge in global commodity prices starting from the fourth quarter of last year.

The Singapore-based bank added the demand-pull inflation is unlikely to strengthen much more in the second half in the absence of above-potential growth in aggregate demand.

South Korea's consumer prices rose 4.1 percent in May from a year earlier after posting a 4.2 percent on-year gain in April. Core consumer prices, which exclude volatile food and energy prices, jumped 3.5 percent on-year in May, higher than a 3.2 percent on-year rise the previous month.

"The BOK will hike the rate again by 25 basis points in August, and then pause. The South Korean won's appreciation against the U.S. dollar will not be an impediment to normalizing the key rate," Tim Condon, head of Asia research at ING Groep in Singapore, wrote in a daily note.

The BOK"s rate hike has been feared to lead the South Korean won to appreciate further against the greenback, but the BOK appeared not to consider heavily the local currency's movement in deciding on its monetary policy.

"The BOK is believed to reduce its burden for the local currency's ascent to the dollar as the government tightened rules on currency derivatives held by local banks and local branches of foreign banks," Jeong Mi-young, a currency analyst at Samsung Futures in Seoul, said in a report.

The country's finance ministry announced last month it will cut the ceilings on currency derivatives banks can hold in a bid to curb rapidly growing short-term foreign debts.

The ceilings for foreign exchange forward positions, which local branches of foreign banks can hold, were lowered to 200 percent of equity capital from 250 percent. The ceilings for domestic banks were cut to 40 percent from 50 percent.

The move is expected to slow the pace of money inflows from overseas as local banks and foreign banks' branches will reduce its external borrowings for hedge purposes.

Domestic uncertainties such as surging household debts were forecast to deter the BOK from aggressively tightening monetary policy in the second half.

Some said the BOK placed a priority on inflation rather than households' interest burdens by lifting the rate, but the BOK will hardly ignore the rising household debts as the Lee Myung-bak government is focusing more on improving livelihood for low- and mid-income earners ahead of the presidential election next year.

In South Korea, outstanding household credit, which includes loans from banks and non-bank financial institutions as well as credit card spending, grew 8.4 percent on-year to 801.4 trillion won (739.98 billion dollars) in the first quarter. It was the fastest quarterly growth since a 9.1 percent on-year expansion in the fourth quarter of 2008, and household credit topped 800 trillion won market for the first time.

"An expected softening in the real-estate market will likely increase caution in the conduct of the BOK monetary policy given the high household debt in the country. We do not expect the BOK to deviate from its steady and gradual interest rate normalization pace," United Overseas Bank wrote in a report right after the BOK' s rate hike decision.

The country's economic data showed a sign of slowing economic recovery. The BOK revised down the real Gross Domestic Product (GDP) on-quarter growth rate for the first quarter to 1.3 percent from the preliminary 1.4 percent. Industrial output grew 6.9 percent on-year in April, marking the lowest on-year expansion in seven months.

Exports began to slow down. Outbound shipments increased 23.5 percent on-year to 48.01 billion dollars in May after recording 49.15 billion dollars the previous month. Trade surplus sharply narrowed to 2.75 billion dollars last month from 5.14 billion dollars a month earlier.

"The BOK is unlikely to raise interest rates aggressively in the second half of this year. Economic conditions must be carefully monitored as there is no firm evidence that the economy and financial markets are out of the woods. The central bank will pace the tempo of its push to raise the key rate to pre-crisis levels," Yoon Yeo-sam, a fixed-income analyst at Daewoo Securities in Seoul, said in a report.

Yoon predicted the BOK to increase the benchmark rate on more time this year, preferably in September or October, to 3.50 percent.

"The BOK will likely work on normalizing the policy rate in a steady manner while flexibly adjusting the magnitude and pace of rate hikes depending on economic conditions," Peter Park, a fixed-income analyst at Woori Investment & Securities in Seoul, wrote in a report.

Editor:Yang Jie |Source: Xinhua

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