The Bank of Korea will keep interest rates at a six-year high as a strong won, oil costs and fallout from the U.S. housing recession threaten growth, a Bloomberg News survey of economists shows.
Governor Lee Seong Tae and his policy makers will keep the overnight call-rate target at 5 percent, according to all 14 economists. The board meets tomorrow in Seoul and will announce a decision before 11 a.m.
``Like the rest of the world, they're holding their breath on the U.S. economy and export demand,'' said David Cohen, an economist at Action Economics in Singapore. ``The won's strength is also a concern.''
Central banks in Europe, the U.K. and Japan have kept rates on hold, concerned that weakness in the U.S. economy and surging oil prices may curb global growth. The won strengthened to above 900 versus the dollar for the first time in a decade last week, curbing exporters' earnings.
Nine economists in the survey expect South Korea to raise rates to 5.25 percent in the first half of 2008 as oil prices stoke inflation.
Consumer prices rose 3 percent from a year earlier in October, the biggest increase in more than two years. Benchmark oil prices have risen about 55 percent this year, reaching a record $96.24 a barrel on Nov. 1.
The benchmark five-year government bond yield rose 4 basis points to 5.48 percent and the won strengthened 0.3 percent to 905.20 per dollar as of 10:34 a.m. in Seoul. The Kospi index added 1.3 percent to 2,081.12.
Inflation Risk
``The principal risk for the Korean economy at this stage is rising oil prices, which are likely to push headline inflation higher,'' said Frederic Neumann, an economist with HSBC Ltd. in Hong Kong.
Hyundai Motor Co.'s Vice Chairman Kim Dong Jin last week called the won's strength the ``No. 1 obstacle'' for exporters. South Korea's currency has surged 32 percent against the dollar since the start of 2004, Asia's best performance, and traded at 907.80 yesterday.
The central bank raised rates in July and August to keep household and business debt from fueling asset-price bubbles and inflation. In the third quarter, the $887 billion economy expanded 5.2 percent from a year earlier, the fastest annual pace in almost two years.
The following table shows expectations for tomorrow's decision and for the next move in rates. ( Bloomberg )