Korea well-positioned to ride the wave of recovery

The Bank of Korea’s next interest-rate move may be an increase as the global recovery improves the outlook for Asia’s fourth-largest economy, swap markets signal.

The five-year contract, the fixed cost needed to receive a floating payment, has risen to 3.26 percent from a record low 2.52 percent in May, when the central bank last cut the seven-day repurchase rate by 25 basis points to 2.5 percent. That’s 50 basis points more than the one-year contract, near the biggest difference since 2011. In China, the gap is 21.

Korea’s won has rallied 2.2 percent in the past month, the most in Asia, on bets Samsung Electronics and Hyundai Motor will be among the biggest beneficiaries as manufacturing activity strengthens in the United States and in euro countries. BOK Gov. Kim Choong-soo and his board, which will keep the benchmark rate unchanged at 2.5 percent on Sept. 12 based on a survey of economists, may lift it to 2.75 percent by the end of June 2014, DBS Group Holdings forecasts.

“The U.S. economy is growing steadily, the euro zone is exiting recession and China recently has showed some signs of bottoming out,” said Ma Tieying, an economist at DBS in Singapore. “Korea will benefit notably due to its large exposure to exports. We expect the BOK to normalize rates from mid-2014.”

The central bank will raise the policy rate to 3 percent by the end of 2014, Ma said. The median forecast among 19 economists surveyed is for an increase to 2.75 percent by the end of next year.

President Park Geun-hye introduced a 17.3 trillion won ($16 billion) supplementary budget in May, the same month Kim delivered the surprise rate cut, seeking to revive an economy that grew 2 percent in 2012, the least in three years.

Gross domestic product rose 1.1 percent in the second quarter from the preceding three months, the most in more than two years, central bank data showed. Asia’s fourth-largest economy will expand 2.8 percent in 2013 and 4 percent next year, which would be the fastest growth since 2010, the central bank forecasts.

Exports, which account for about half of GDP, jumped 7.7 percent in August, the most since January, official data show. Shipments to the United States rose 17.9 percent and overseas sales of cars increased 44 percent and wireless telecommunications devices 26 percent.

Samsung, the world’s biggest smartphone maker, will start selling a wristwatch that can make phone calls, surf the Web and take photos this month. That may fuel exports to the United States, where a manufacturing gauge released this week was at its highest level since June 2011.

“We think the next move will be a hike and this should come closer to the end of next year,” Wai Ho Leong, a senior regional economist at Barclays in Singapore, said. “Korea is relatively more synchronized to an upturn in the U.S. business cycle.”

Korean inflation was 1.3 percent in August, compared with 1.4 percent in July, and has not exceeded 2 percent since October 2012, official data show.

The Fed will hold its benchmark rate at 0.25 percent through the end of next year, according to a survey conducted Aug. 7. Some 65 percent of analysts in a separate survey in August expect the U.S. central bank to start tapering its $85 billion a month of bond-buying this month.

The yield on Korea’s government bonds due March 2023 has increased 71 basis points to 3.65 percent since May 22, when the Fed first indicated it might reduce stimulus. The Kospi index of shares dropped 1.2 percent over the same period. Bloomberg