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Yahoo! My Yahoo! Mail More Yahoo! Services Account Options New User? Sign Up Sign In Help Yahoo! Search web search Home Singapore Asia Pacific World Business Entertainment Sports Technology Singapore Asia Pacific World SCENARIOS-Bank of Korea to hold rates, flag rise by year-end Reuters - Wednesday, October 7 Send IM Story Print By Seo Eun-kyung and Yoo Choonsik SEOUL, Oct 7 - South Korea's central bank looks set to leave interest rates on hold this week but is expected to flag an increase as early as next month, with the economy gathering pace and a property boom sustaining momentum. Investors had been increasingly predicting a rate rise in November. The Australian central bank's surprise rate rise on Tuesday has simply boosted the chances. [ID:nSEO186728] Here are some possible outcomes of the Bank of Korea's monetary policy committee meeting, due to be announced at around 0100 GMT on Friday, as well as expected market reaction: RATES ON HOLD, BUT CONCERN OVER PROPERTY BOOM The Bank of Korea will hold the 7-day repurchase agreement rate <KROCRT=ECI> steady for an eighth consecutive month but repeat that house prices and mortgage loans keep growing despite the government's regulatory steps to cool the market. Latest private bank data shows that house prices in September rose by their fastest in 15 months. It is also expected to tone down or even drop the reference to high uncertainty facing Asia's fourth-largest economy. If so, it would signal confidence that the economy was strong enough to cope with higher borrowing costs. * Probability: high * Market reaction: Given the central bank's warnings that a sustained growth in housing prices and loans could force it to raise rates, comments suggesting that the trend continued unabated would convince investors a rate rise was on the cards. [ID:nSEO285454] Bond and stock prices would dip while the won <KRW=> could tick up moderately, given that a rate rise in the final two months of the year has already been largely priced in. CENTRAL BANK FLAGS RATE INCREASE The Bank of Korea will keep rates steady, but may say outright they will have to go up in the very near future because the economy is performing far better than it had earlier expected and the property market boom is approaching a dangerous level. Investors would take that as meaning the Bank of Korea would start raising rates from November, as many had already priced in, but perhaps at a much faster pace than had been so far expected. A more aggressive approach would, however, sharply increase the already high tension between the central bank and the government of President Lee Myung-bak, which wants credit costs to stay low for an extended period to nurture economic growth. * Probability: medium * Market reaction: Bond and stock prices would tumble while the won would rise sharply as that would come as a big surprise to investors, who have expected the Bank of Korea to adopt a very gradual tightening campaign. CENTRAL BANK SAYS PROPERTY BOOM MODERATING The Bank of Korea will stay pat on rates and may say it sees some signs of moderating growth in property prices and mortgage loans after the government limited mortgage loans in the capital area in late August, and that it needs more time to assess the trends. [ID:nSEO324778] Investors would see that as a sign that the central bank was not ready to step on the brakes just yet and might hold off with rate increases until some time next year. * Probability: low * Market reaction: Bond and stock prices would rise while the won will weaken because investors will rush to reduce their bets on a rate rise within 2009. RATES RAISED, MORE TO COME The Bank of Korea may increase the benchmark rate by 25 basis points for the first time since August last year, emboldened by Australia's move on Tuesday and making it clear that it would spare no effort to quell property speculation. It may also say the economic recovery has reached a self-sustained stage and that consumer spending was rising faster than incomes, largely driven by rising asset prices. It would also warn that inflation could spike soon, if interest rates were kept too low for too long. * Possibility: very low * Market reaction: Bond and stock prices would suffer the biggest drop since the collapse of Lehman Brothers hit the global markets a year ago. Some investors would also start to price in a heightened risk of the economy facing a double-dip slump soon. Recommend Send IM Story Print Related Articles Thousands of Romanian workers protest low wages AP - Wednesday, October 7 Q+A-Will Aussie dollar finally hit parity to U.S. dollar? Reuters - Wednesday, October 7 Nikkei up 1.1 pct, commodity shares and banks jump Reuters - Wednesday, October 7 Murdoch in Asia, checking out e-reader partners? 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