Analysts divided over key rate policy

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Analysts divided over key rate policy

With the Bank of Korea scheduled to set its key interest rate this week, market watchers remain split over whether the central bank may cut the borrowing cost to counter the local currency’s surge against the U.S. dollar or leave it unchanged.

Some experts predicted the central bank will lower the benchmark interest rate by a quarter percentage point to 2.50 percent on Friday in a bid to cope with the won’s sharp ascent to the greenback.

“The local currency has been appreciating against the dollar at the fastest clip in the world due to strong U.S. and Japanese monetary policy,” said Yeom Sang-hoon, an analyst at SK Securities. “Given that, the BOK is highly likely to cut the interest rate to cope with an expected surge in fund inflows into Korea.”

Last year alone, the Korean currency climbed more than 8 percent against the greenback, spawning concern that it could eat into the country’s exports, which are a key driver of its economic growth.

A strong won usually hurts the price competitiveness of local exporting companies by making their goods more expensive in overseas markets.

Lim Jin, a researcher at the Korea Institute of Finance, said the BOK may opt for a rate reduction in an effort to prop up the slumping economy. “The government’s recent decision to front-load more than 70 percent of its budget in the first half mirrors its strong will to bolster the economy,” he said.

The government has cut its growth outlook to 3 percent from an earlier 4 percent, citing lingering external uncertainties.

Other experts projected the BOK to hold the key interest rate steady for this month, saying economic conditions have not reached their worst level yet.

“The economy doesn’t seem to be slumping as fast as in July and October last year, when the central bank cut the key rate,” said Park Jong-yeon, an analyst at Woori Investment & Securities. “A rate freeze would have the effect of boosting the economy.”

In December, the central bank froze the key interest rate at 2.75 percent for the second straight month, opting to preserve policy room in the face of global economic uncertainty. Last year, the BOK cut the key rate twice by a quarter percentage point each to 2.75 percent in an effort to boost growth amid the protracted global downturn and a slowing local economy.

Park further said the government’s planned front-loading of its budget could give the central bank more time to adjust the key interest rate.

On Friday, the BOK is also scheduled to announce its economic growth outlook for 2013. The central bank earlier forecast Asia’s fourth-largest economy will expand 3.2 percent this year, but market watchers say the BOK will have no choice but to revise down the number slightly.

Yonhap

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