Economists expect BOK to resume rate hikes in May

16:17, March 10, 2011      

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The Bank of Korea (BOK) is likely to raise the key rate again in May, a survey showed Thursday.

According to the survey conducted by Xinhua, 8 experts among 9 respondents expect it to lift its policy rate by 25 basis points to 3.25 percentage points in May.

The BOK Governor Kim Choong-soo and monetary policy board members decided to lift the 7-day repurchase rate by 25 basis points to 3 percent this month following a rate freeze in February.

Previously, the BOK has lifted the key rate by 75 basis points from a record-low of 2 percent.

Market watchers at home and abroad said the BOK will likely suspend further hikes in April in a bid to assess how the March's rate hikes would affect the nation's economy.

However, the BOK is projected to resume monetary tightening in May to curb inflationary pressures both from supply and demand sides.

"Inflation has been high in most parts of Asia, but pressure has been more acute in South Korea," Jonathan Cavenagh, a currency strategist at Westpac Banking in Singapore, said in an email interview.

"Demand growth is quite strong in South Korea at the moment. Household borrowing has been strong and consumption growth has been running along at quite a brisk pace. We see risks of further tightening in May given the inflation outlook," Cevenagh said.

"Supply-side inflation appears to be the key concern now as a result of the high oil prices although demand side inflationary pressure could also continue to pick up as the economy strengthens, " Ho Woei Chen, a Singapore-based economist at United Overseas Bank, told Xinhua.

"The BOK will hike earlier rather than later as a result of the inflation concerns and this suggests that May would be more favorable in terms of timing," Ho predicted.

Experts who predicted the BOK's rate hike in May include 8 financial institutions at home and abroad, including ING Groep, DBS Group, BNP Paribas, Westpac Banking, United Overseas Bank, Nomura Holdings, SC First Bank Korea and Woori Investment & Securities.

"Given our forecast that CPI inflation will rise further in coming months, we expect the BOK to deliver two more 25bp rate hikes in May and July," Kwon young-sun, a Hong Kong-based economist at Nomura, said via an email.

"The BOK has been raising the policy rate bimonthly and the inflationary pressures will not be eased in the near term. The BOK will resume its rate hikes in May again," Oh Suk Tae, a Seoul- based economist at SC First Bank Korea, said in a phone interview.

SK Securities, however, put the timing of the BOK's rate hike at June, saying that inflationary pressures will be gradually eased after May.

"The BOK has already lifted the rate four times and the nation's inflationary pressures will not be strong after March. The BOK is estimated to hike rates in June," Yum Sang-hoon, a fixed-income analyst at SK Securities in Seoul, said by phone.

Source: Xinhua
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