The Bank of Korea may keep interest rates unchanged at an almost seven-year high this week after inflation accelerated and overseas shipments surged, Bloomberg reported.
Governor Lee Seong Tae will leave the seven-day repurchase rate at 5 percent on May 8, according to 13 of 20 economists surveyed by Bloomberg News. Seven expect a cut. Policy makers last adjusted the benchmark with a quarter-point increase in August.
Rising food and fuel costs drove the biggest increase in South Korean consumer prices in almost four years in April and caused the sixth consecutive monthly breach in the central bank's inflation target. The report, combined with another that showed exports expanded by the most since 2004, may prompt Lee to resist pressure from the government to lower borrowing costs.
``Robust external-demand growth and high inflation pressure in April reinforces our view the monetary policy committee will not likely cut the policy rate at the May 8 meeting, despite apparent political pressure,'' Eva Yi, a Hong Kong-based economist at Goldman Sachs Group Inc., wrote in a note.
Finance Minister Kang Man Soo said last month the economy has entered a ``downturn,'' and also emphasized that South Korea's interest rates are higher than those of many other nations, including the U.S.
The Federal Reserve's benchmark rate is 2 percent, while the European Central Bank's is 4 percent and Japan's is 0.5 percent.
Kang said economic growth could fall short of the government's 6 percent target this year. He's seeking to boost public spending by 4.9 trillion won ($4.8 billion) to spur Asia's fourth-largest economy, which expanded 5 percent in 2007.
``The government has been making pessimistic comments on the economy lately, and that is probably a way to justify the need'' they see for a rate cut, said Kim Jae Eun, an economist at Hana Daetoo Securities Co. in Seoul. ``The central bank will feel more pressure.''
There's evidence domestic demand is cooling in South Korea.
The economy grew at the slowest pace in more than three years last quarter on weaker consumer and business spending. An index of leading economic indicators fell for a third month in March and the number of new hires declined to a three-year low.
Still, Governor Lee may not join counterparts in the U.S., Canada and England who have all reduced borrowing costs this year amid a global credit-market crunch.
The Bank of Korea is concerned that inflation, at 4.1 percent in April, may accelerate. It aims to keep annual consumer-price increases between 2.5 percent and 3.5 percent, on average, for the three years to 2009.
``The Bank of Korea's pre-determined inflation target and the new government's ambitious 2008 GDP growth target look incompatible given the current adverse price shocks,'' said Kwon Young Sun, an economist at Lehman Brothers Holdings Inc. in Hong Kong.
Global prices for oil, corn, wheat and soybeans have all reached records this year, while rice prices have more than doubled in the past year.
Any interest-rate cut may drive down South Korea's won, Asia's worst performing currency against the U.S. dollar in 2008.
A weaker won has boosted the cost of imported goods and exacerbated the pressure on South Korean inflation caused by soaring global commodity prices.
The won's 6.4 percent drop versus the dollar this year has helped Samsung Electronics Co. and other exporters by making their products cheaper abroad and increasing the value of their overseas sales translated into the local currency.
Exports jumped 27 percent in April from a year earlier thanks to increased demand from China and other emerging markets. Overseas shipments were the engine of more than half of the economy's 0.7 percent expansion in the first quarter.
It also may be difficult for Governor Lee and his colleagues to cut rates this month because they are meeting for the first time since President Lee Myung Bak replaced three of the central bank's seven-member board following the end of the previous policy makers' terms.
``The board, especially with three new members, will need more time to build a consensus for any rate change,'' said Lehman's Kwon.