The Bank of Korea is forecast to freeze the benchmark interest rate for a ninth straight month next week, as it sees inflation moderating to its target range while concerns persist over Europe’s sovereign debt crisis.
All five economists surveyed said the BOK would feel more comfortable keeping the rate unchanged at 3.25 percent.
“It will be the issue of cutting it in preparation for more rainy days or freezing it. There is a higher possibility of a rate freeze,” Oh Suk-tae, an economist at Standard Chartered Bank of Korea, said after inflation came in at a 14-month low on Friday.
“Fluctuating oil prices are a problem but the key rate is more likely to stay at this level given that policymakers expect the economy to bottom out within the first two quarters this year,” Oh added.
While UBS, Barclays Capital and Citi Group also expect a freeze for March, the outlook was mixed for April and beyond.
BNP Paribas and Nomura Securities said the rate is likely to be lowered this quarter.
HSBC, which initially predicted a rate cut in March, changed its outlook to a raise of 25 basis points in the fourth quarter.
“Just when Korea’s headline CPI started to look comfortable again, soaring oil prices are putting the market back on the inflation watch,” said Ronald Man, a Hong-Kong based economist at HSBC.
Man said the relationship between Korean inflation and oil has strengthened since 2005, with headline readings reacting stronger and faster to changes in Brent prices. He said if oil prices are sustained at $120 per barrel, it will add up to a 0.5 percentage point increase to CPI over the coming months.
“It isn’t just oil. Liquidity is returning into Asia as cost pressures continue to rise,” he added. Finance Minister Bahk Jae-wan last week said the inflation rate could accelerate above the government’s forecast of 3.2 percent this year due to higher oil prices.
The on-year inflation rate was 3.1 percent for February, down from 3.4 percent in January, Statistics Korea said.
Bahk on Thursday said the government will not take expansionary policy action as the growth path is projected to stay healthy.
The country’s exports in February grew 22.7 percent from a year earlier, rising by the most in six months after falling 7 percent in January, the government data said. Exports were $47.2 billion in February, up from $41.3 billion in January.
