Inflation may force rate hike: HSBC economistTaking into consideration inflationary pressure, it is likely the Bank of Korea will raise the country’s benchmark interest rate later this year, said Stephen King, a chief economist at HSBC Bank, yesterday.
“As far as the won is concerned, the difficulty there is that there are lots of cross-currency [flows] taking place at the moment,” he said. “There are obvious uncertainties in the direction of Korea’s monetary policy. Our expectation is [that] currently the next move in the Korean rate will be up later this year.”
Korea’s central bank has left its benchmark interest rate unchanged at 2.75 percent last week for the fifth consecutive month.
“The main reason is that we’re concerned that perhaps a little later this year inflation will be not ridiculously high but high enough to warrant the Bank of Korea to raise rates,” King said. “I’m well aware that the current speculation is either about a rate cut or not a rate cut but it’s better to say that there will not be a rate cut in the short term. But eventually later this year, there will be conditions for a first rate increase.”
King, who is based on London, visited Seoul to share his thoughts on the impact of so-called “Abenomics,” referring to Japanese Prime Minister Shinzo Abe’s economic policies focusing on weakening the yen to gain competitiveness in exports.
While Korean export companies have been significantly impacted by Tokyo’s aggressive currency policy, King said the trend will not continue in the long term.
“Based on our current forecast, we think that the yen will strengthen later this year,” he said.
He added that if the policy does not meet expectations in Japan, it will shed its aggressive image and the yen will strengthen later this year.
Still, there will be short-term effects on Korea.
“The elements from the past do suggest that in light of a significantly weaker yen against the won, we expect to see some weakness coming through in Korean exports relative to Japanese exports,” King explained.
“Korea should be advancing the benefits of the open international trading system, which is a system from which Korea has benefitted enormously in recent years.”
By Lee Eun-joo [firstname.lastname@example.org]