By Seo Eun-kyung
SEOUL, Dec 8 (Reuters) - South Korea's central bank will likely hold interest rates at a record low again this week and hint it is not ready yet to start tightening policy due to a prolonged slump in demand from most advanced economies.
The Bank of Korea may also refer to recent global market turbulence over Dubai's debt crisis as evidence Asia's fourth-largest economy still needs eased policy support.
Here are some possible outcomes of the Bank of Korea's monetary policy committee meeting and the subsequent news conference by its governor, both due on Thursday, as well as the expected market reaction:
LOOSE POLICY TO STAY 'FOR TIME BEING'
The Bank of Korea will likely hold the 7-day repurchase agreement rate steady at 2.0 percent for a tenth consecutive month and reiterate its months-long pledge to keep its monetary easing policy 'for the time being.'
Investors have pushed back their expectations for a rate hike deeper into 2010, a Reuters poll showed on Tuesday, after the central bank widened its inflation target band and adopted the government's cautious approach on an exit strategy.
A majority of the 13 respondents surveyed by Reuters said the central bank would raise rates in the second quarter or later in the year compared with the first quarter of 2010 in the previous poll last month.
The central bank is expected to present a better assessment for the domestic economy after upbeat third-quarter growth data but say record-low rates are needed to make up for waning government spending, with no signs of an imminent inflation threat.
It is also likely to underscore signs of a moderating property market boom helped by recent government lending controls, by reiterating its previous statement that 'the upward trend of real estate prices appears to have faltered.'
* Probability: high
* Market reaction: Bond and stock prices will show little reaction as they have already priced in expectations that rates will be held steady for several more months. The won will also see little change.
The one-year bond yield slipped nearly 20 basis points after the previous meeting on Nov. 12 to late November, as investors expected rates to remain on hold for longer.
FLAGS HIKE ON FAST RECOVERY
Given the faster-than-expected pickup in economic growth in the third quarter, some analysts say there is a small risk that the Bank of Korea would flag rate hikes early next year by dropping pledges to keep an easy policy stance.
It could stress future policy, independent of the government's opinion, would hinge on economic and financial conditions.
With many analysts and policymakers projecting about 5 percent economic growth next year, the central bank could call for higher vigilence on a consequent buildup in inflationary pressures, renew its warnings about possible asset price bubbles, and voice concerns about the won's rise against the dollar.
* Probability: low
* Market reaction: Bond and stock prices will fall and the won will rise as investors scramble to price in a possible rate hike earlier than expected.
HIKE RATES, MORE TO COME
It is highly unlikely that the Bank of Korea would suddenly raise the benchmark rate by 25 basis points for the first time since August last year, citing a faster than expected economic recovery and rising hopes for self-sustained growth.
It would surprise markets if it signals more rate hikes to come by saying the rates should be normalised in line with the economic recovery as part of an exit from unprecedented emergency steps taken to combat the global financial crisis, with a fast economic recovery and abundant liquidity seen propelling higher inflation expectations.
* Possibility: highly unlikely
* Market reaction: Bond and stock prices will tumble and the won will jump as investors brace for a faster-than-expected rate tightening campaign.
(Editing by Jonathan Hopfner)
((eunkyung.seo@thomsonreuters.com; +82 2 3704 5648; Reuters Messaging;eunkyung.seo.reuters.com@reuters.net)) Keywords: KOREA ECONOMY/RATES (If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
SEOUL, Dec 8 (Reuters) - South Korea's central bank will likely hold interest rates at a record low again this week and hint it is not ready yet to start tightening policy due to a prolonged slump in demand from most advanced economies.
The Bank of Korea may also refer to recent global market turbulence over Dubai's debt crisis as evidence Asia's fourth-largest economy still needs eased policy support.
Here are some possible outcomes of the Bank of Korea's monetary policy committee meeting and the subsequent news conference by its governor, both due on Thursday, as well as the expected market reaction:
LOOSE POLICY TO STAY 'FOR TIME BEING'
The Bank of Korea will likely hold the 7-day repurchase agreement rate steady at 2.0 percent for a tenth consecutive month and reiterate its months-long pledge to keep its monetary easing policy 'for the time being.'
Investors have pushed back their expectations for a rate hike deeper into 2010, a Reuters poll showed on Tuesday, after the central bank widened its inflation target band and adopted the government's cautious approach on an exit strategy.
A majority of the 13 respondents surveyed by Reuters said the central bank would raise rates in the second quarter or later in the year compared with the first quarter of 2010 in the previous poll last month.
The central bank is expected to present a better assessment for the domestic economy after upbeat third-quarter growth data but say record-low rates are needed to make up for waning government spending, with no signs of an imminent inflation threat.
It is also likely to underscore signs of a moderating property market boom helped by recent government lending controls, by reiterating its previous statement that 'the upward trend of real estate prices appears to have faltered.'
* Probability: high
* Market reaction: Bond and stock prices will show little reaction as they have already priced in expectations that rates will be held steady for several more months. The won will also see little change.
The one-year bond yield slipped nearly 20 basis points after the previous meeting on Nov. 12 to late November, as investors expected rates to remain on hold for longer.
FLAGS HIKE ON FAST RECOVERY
Given the faster-than-expected pickup in economic growth in the third quarter, some analysts say there is a small risk that the Bank of Korea would flag rate hikes early next year by dropping pledges to keep an easy policy stance.
It could stress future policy, independent of the government's opinion, would hinge on economic and financial conditions.
With many analysts and policymakers projecting about 5 percent economic growth next year, the central bank could call for higher vigilence on a consequent buildup in inflationary pressures, renew its warnings about possible asset price bubbles, and voice concerns about the won's rise against the dollar.
* Probability: low
* Market reaction: Bond and stock prices will fall and the won will rise as investors scramble to price in a possible rate hike earlier than expected.
HIKE RATES, MORE TO COME
It is highly unlikely that the Bank of Korea would suddenly raise the benchmark rate by 25 basis points for the first time since August last year, citing a faster than expected economic recovery and rising hopes for self-sustained growth.
It would surprise markets if it signals more rate hikes to come by saying the rates should be normalised in line with the economic recovery as part of an exit from unprecedented emergency steps taken to combat the global financial crisis, with a fast economic recovery and abundant liquidity seen propelling higher inflation expectations.
* Possibility: highly unlikely
* Market reaction: Bond and stock prices will tumble and the won will jump as investors brace for a faster-than-expected rate tightening campaign.
(Editing by Jonathan Hopfner)
((eunkyung.seo@thomsonreuters.com; +82 2 3704 5648; Reuters Messaging;eunkyung.seo.reuters.com@reuters.net)) Keywords: KOREA ECONOMY/RATES (If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.