Futures and Commodity Market News

Sat May 17, 2008

Breaking financial news 24/7 courtesy of TradingCharts.com Inc. / TFC Commodity Charts

SEOUL, May 09, 2008 (Asia Pulse Data Source via COMTEX) -- South Korea's central bank on Thursday left its key interest rate unchanged for May for the ninth straight month on rising inflation and warned inflation is likely to remain stubbornly high for several months.

The Bank of Korea (BOK) said soaring oil costs and a weaker local currency against the U.S. dollar are stoking the country's inflation, denting hopes for an immediate rate cut.

BOK Gov. Lee Seong-tae and his six fellow policymakers froze the 7-day repurchase agreement rate, dubbed the base rate, at 5 percent. The BOK has held the key rate steady to gauge the effect of a financial market rout on the country's economy since the bank's first back-to-back increases in July and August.

"The growth of the local economy is 'significantly' slowing with domestic demand weakening... and the Korean economy may grow 4.5 percent or below this year, lower than the bank's previous forecast of 4.7 percent," Lee told a press conference.

Lee also warned of rising inflation pressures, saying "Given soaring oil costs and a weaker won, inflation is likely to remain higher for several months." The bank earlier thought that inflation may slow down in the third quarter, but unless those price factors stabilize, it may be difficult for consumer prices to move back into the BOK's target range of 2.5-3.5 percent in the third quarter, the governor said.

Lee said the monetary policy will be determined according to circumstances on a monthly basis. "The rate freeze came as we thought it is not the right time to change our monetary stance in May. We have not decided on the direction of the rate after June."

But after the governor's remarks, June treasury bond futures tumbled 74 ticks to 107.41 as his warnings of inflation prompted bond investors to pare bets on a rate cut. The won plunged 2.2 percent to 1,049.6 won against the greenback.

"The BOK will likely focus on oil prices and the currency in managing its policy. In the short term, the outlook for a rate freeze is increasing, but I think there is still room for a rate cut this year," said Lee Sang-jae, an economist at Hyundai Securities Co.

Economists said the May rate freeze comes as mounting inflationary pressures outweigh concerns over a slowdown of Asia's fourth-largest economy that may stem from a possible U.S. economic recession.

"The BOK froze the rate despite growing pressures by the government to cut the borrowing costs," said Seo Cheol-soo, an economist at Daewoo Securities Co.

The BOK, which is mandated to operate its monetary policy independently, has been under political pressure to slash the policy rate to help the government's efforts to boost the economy.

The BOK earlier said the economy is expected to grow 4.7 percent in 2008, down from 5 percent last year, but President Lee Myung-bak, who took office in February, has vowed to raise the economic growth rate to around 6 percent this year by easing regulations and cutting taxes.

South Korea's consumer prices rose a higher-than-expected 4.1 percent in April due to soaring oil and grain prices, breaching the BOK's target band for a fifth straight month.

The price of Dubai crude, South Korea's benchmark, jumped 62 percent in April, compared with a year earlier. South Korea, the world's fifth-largest crude buyer, relies entirely on imports for its oil needs.

A weaker won against the U.S. dollar is also putting upward pressure on already high inflation as it makes imports more expensive. The local currency has fallen 10.81 percent against the greenback so far this year.

The state-run Korea Development Institute said Tuesday consumer prices are expected to rise 4.1 percent in 2008 on higher import prices and a weaker won.

Ample liquidity and a pickup in the growth of bank loans to firms and households in April gave little leeway for the BOK to cut the rate, according to economists.

The South Korean economy is facing growing downside risks with some economic data signaling that the economy may lose steam, experts say.

The economy grew 0.7 percent on-quarter in the first quarter, the slowest pace in more than 3 years, as facility investment dipped amid sluggish domestic demand. The index of leading indicators measuring future economic situations fell for the fourth consecutive month.

But South Korea's exports, which account for about 40 percent of the economy, remained robust with overseas shipments growing 27 percent on-year in April on healthy demand from emerging markets. The stronger numbers alleviated some concerns that the slowing global economy is crimping demand for the country's exports, experts say.

Economists added that the rate freeze comes as the BOK board with three new members may need time to adjust opinions for a possible rate cut. President Lee appointed three professors as new board members in April as their predecessors' four-year terms ended.

Despite the BOK's repeated warnings of inflation, economists said the BOK will likely slash the rate to prop up the slowing economy although the timing may be pushed back.

"I think there is still a possibility that the BOK will cut the rate twice this year" said Lee at Hyundai Securities.

Copyright 2008 APU Newswire. All rights reserved.

Please read the End User Agreement.
By accessing this page, you agree to the terms and conditions of the End User Agreement.

News provided by COMTEX