Korean debt woes may moderate BOK's rate increases

The Bank of Korea (BOK) may have to moderate its stride at its final rate-setting meeting next month even at the risk of widening the gap with galloping U.S. rates in light of the fragility of the local debt market and liquidity squeeze triggered by default declare in securities issued by a public corporation.

BOK was widely anticipated to deliver the second straight hike in 50 basis points in November as the U.S. Federal Reserve is most certain to fire off the fourth consecutive hike in 75 basis points earlier on next month. The Fed funds rate is expected to reach 4.25-4.50 percent by the year-end if a raise in 50 basis points is followed in December.

Since BOK has just one meeting left in the year in November, Korea’s base rate would have arrived at 3.5 percent after another big step in a half a percentage point as not to stoke further capital flight from the local markets and weaken the Korean won whose depreciation has been worsening trade deficit and inflation amid high reliance on commodity imports.

But the tightening campaign may not proceed as planned due to the unexpected spillover from a default on government-guaranteed securities that went to finance the construction of Legoland amusement park in Gangwon Province.

“There are many factors behind the instability in the debt market, but the unprecedentedly fast rate increases are the primary cause,” observed Kim Joo-hyun, chairman of the Financial Services Commission, during an emergency economic meeting on Sunday.

The Korean base rate has zoomed from 0.5 percent in May last year to 3.0 percent by October through uninterrupted increases that included two hikes in 50 basis points.

“The BOK can moderate the pace to raise the key rate by 0.25 percentage point (in November) given concerns about the sluggish economy and a liquidity crunch,” said Kim Jung-sik, professor of economy at Yonsei University.

NH Investment & Securities’ analyst Kang Seung Won also projected a hike in a quarter of a percentage point as not to further upset the debt market.

The decision behind the 50 basis-point hike in October had not been unanimous with two voting for a 25-basis-point raise.

Inflation data and won-dollar exchange rate, however, call for more decisive tightening.

According to consumer survey data for October released by the BOK Tuesday, expected inflation rate rose to 4.3 percent as inflation still runs close to 6 percent.

The U.S. dollar hit fresh high for the year at 1,444.2 won early Tuesday. It came down to 1,433.2 won possibly from intervention.

“The exchange rate would be as important factor as inflation rate at the next rate meeting,” said Joo Won, head of economic research at Hyundai Research Institute.

Meanwhile during parliamentary questioning Tuesday, BOK Governor Rhee Chang-yong said the central bank was not considering active bond buying program to directly ease liquidity woes of corporations for the time being as the move goes against tightening through rate increases.

[ⓒ Maeil Business Newspaper & mk.co.kr, All rights reserved]