(News Focus) BOK expected to cut key rate for March

By Kim Soo-yeon
SEOUL, March 8 (Yonhap) -- South Korea's central bank is widely expected to
further cut its key interest rate for March to keep the local economy from
slipping into the first recession in 11 years.
Some experts, however, caution that the Bank of Korea (BOK) may freeze the
benchmark seven-day repo rate due to a weaker won and an upturn in consumer
prices when it calls a monthly rate-setting meeting on Thursday.
The South Korean economy, Asia's fourth-largest, is forecast to shrink this year,
the first annual contraction since the 1997-98 Asian financial crisis, hit by
tumbling exports and flaccid domestic demand.
Since October, the BOK has slashed the benchmark rate by a total of 3.25
percentage points to a record low of 2 percent in a desperate bid to stave off a
recession, defined as two straight quarters of contraction.
Despite heated controversy over how low the key rate should go to prop up the
sagging economy, most experts said the BOK is projected to lower borrowing costs
by a quarter percentage point.
"The BOK is forecast to cut the rate to put the brakes on the deepening economic
downturn," said Jeon Hyo-chan, an economist at Samsung Economic Research
Institute. "But a larger cut is unlikely because it would leave the bank with few
cards to play in coping with further economic deterioration."
The view is widely backed up by a recent poll conducted by Yonhap Infomax, the
financial news arm of Yonhap News Agency. A total of 10 economists out of 20
financial institutions predicted that the BOK will lower the rate by 0.25
percentage point, the poll showed. Six experts forecast a freeze while four
expected half a percentage point cut.
A set of economic data is reinforcing concerns that Asia's fourth-largest economy
is rapidly heading into a recession.
The country's industrial output tumbled a record 25.6 percent in January from a
year earlier. Exports, which account for about 60 percent of the local economy,
fell 17.1 percent on-year in February as the global recession dented demand for
Korean products.
On Feb. 10, Finance Minister Yoon Jeung-hyun said that the Korean economy will
likely contract 2 percent in 2009. BOK Gov. Lee Seong-tae said it is very likely
that the local economy will post negative growth this year.
But some anticipated a rate freeze this week, saying that the BOK may consider
the effects of earlier aggressive rate reductions and that a further rate cut
could put downward pressure on the already-weak local currency, sparking jitters
about inflation.
"Market interest rates have not responded sensitively to the BOK's 0.5 percentage
point cut in February. Although the bank's monetary easing is expected to go on,
it is likely to stand pat on the rate in March to gauge the impact of a series of
rate cuts," said Gong Dong-rak, a fixed-income analyst at Hana Daetoo Securities
Co.
South Korea's consumer prices unexpectedly rose 4.1 percent on-year in February,
accelerating from a 3.7 percent gain the previous month and marking the first
upturn in seven months. The gain in consumer prices came as fuel prices rose and
a weaker won hiked import costs.
A weaker won against the greenback puts upward pressure on inflation as it makes
imports more expensive. The local currency declined to an 11-year low on Monday
amid dollar shortage concerns and possible default risks in some Eastern European
countries. The won has dipped 18.7 percent against the dollar so far this year
after tumbling 25.7 percent in 2008 alone.
"A further rise in consumer prices would create some headache for the BOK, giving
it sufficient rationale to freeze the rate this month," Gong added.
Whether predicting a rate cut or a freeze in March, economists agree that the BOK
will likely continue to take easing steps until the first half, though it could
adjust the pace of rate reductions to brace for further economic deterioration.
Indeed, BOK Gov. Lee said after the February rate-setting meeting that while
additional rate changes are possible, the central bank will adjust its pace after
closely monitoring the financial market.
"The local economy is expected to face a bumpy road this year. The government and
the central bank need to concentrate their efforts to bolster the fast slowing
economy," said Lee Sung-kwon, an economist at Goodmorning Shinhan Securities Co.,
adding that the BOK may cut the rate to 1.25 percent by the end of June.
sooyeon@yna.co.kr
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