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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 Q+A-S.Korean govt row with c.bank tempers rate expectations Reuters - Tuesday, January 12 Send IM Story Print By Seo Eun-kyung SEOUL, Jan 11 - The growing row between the central bank and the government has tempered market expectations for not only when interest rates will rise, but the pace of monetary tightening this year. The Bank of Korea underscored on Friday its intention to raise rates as soon as February even though the government intensified its pressure on the central bank not to risk derailing economic recovery. [ID:nTOE60700U] Following are questions and answers about the conflict: WHAT HAPPENED ON FRIDAY? For the first time in a decade, the government took up its legal right to attend the central bank's Monetary Policy Committee meeting to present its economic and policy views. Vice Finance Minister Hur Kyung-wook sat in on the meeting. Under the arrangement, he has no vote on policy. The official explanation for the change of heart was that the government wanted to help improve policy coordination and risk management. But the minister's presence was widely seen as a less-than-subtle attempt to increase pressure on monetary policymakers to keep rates on hold. His remarks to the meeting will be made public next month. BOK Governor Lee Seong-tae did not appear to be cowed. He maintained that the current record-low interest rate of 2 percent was too low for an economy expected to grow in 2010 at the fastest pace in the Organisation for Economic Co-operation. He insisted that higher rates would not constitute monetary policy tightening. WHAT IS DRIVING THE CONFLICT BETWEEN THE BOK AND GOVERNMENT? Since he took office in early 2008, President Lee Myung-bak has pressed for measures to help the business sector. His government's success in coping with the impact of the global economic downturn has played a major role in the sharp rise in his popularity ratings. In recent months, he has made plain his wish to keep interest rates low until he can be more certain the economic recovery is secure. The central bank considers the prolonged low level of rates as high risk for inflation and the creation of asset bubbles. Indeed, it threatened in August and September to raise rates to calm a surging housing market. It backed off when new regulations were introduced. The central bank says a small rise in rates still allows for easy monetary policy which is compatible with the government's pro-growth objectives. But President Lee will want to secure some votes from the rapid economic recovery when his ruling party heads into battle in local elections in June. A poor showing could dent his ability to push through more economic reforms. WHERE DOES THAT LEAVE THE OUTLOOK FOR MONETARY POLICY? Analysts maintain that the central bank will still raise rates as soon as next month, believing the government pressure will not succeed in delaying the first rate rise since the global financial crisis. In a Reuters poll after the policy meeting, seven of 10 analysts said rates would rise by March. Others said they would not rise until the second quarter. However, financial markets are telling a slightly different story. Bond futures rallied last week and again on Monday to factor in the risk that rates might not rise as soon as many expect. Analysts argue that Governor Lee will instigate one rate rise of 25 basis points before he retires in March at the end of his four-year term. But the more intensive government pressure will result in a slower pace of monetary tightening this year. Lee's departure will leave the door open for the president to appoint a successor more sympathetic to the government's view of the economy. ING said it has scaled back its expectations for rate rises to 50 basis points by mid year from 125 basis points previously. One-year interest rate swaps <KRQMCD1Y=KMBC> gained more than 30 basis points to a more than 12-month high of 3.69 percent between Dec. 10, when the BOK hinted at a looming rate rise, and Jan 4. But it has retreated sharply to 3.45 percent as the market takes bets for an imminent rate rise off the table. Another concern for the government is the won's jump to a 15-month high against the dollar <KRW=>. Given its potential impact on the country's exports, the government will likely use what tools it can to keep it from rising any more. That would include keeping interests rates steady in line with other larger economies. (Reporting by Seo Eun-kyung; Editing by Jonathan Thatcher and Neil Fullick) Recommend Send IM Story Print Related Articles Spotty euro area recovery complicates ECB policy AP - 43 minutes ago Ford Fusion Hybrid wins 2010 car of year award AP - 49 minutes ago Brewers pitch bill to catch ticket scalpers AP - 52 minutes ago NYC asks food manufacturers to cut salt content AP - 53 minutes ago Super Bowl ad prices fall; still cost millions AP - 54 minutes ago News Search Top Stories US keeps AAA rating with Fitch despite concerns World economy getting back to normal: central bankers Battered Detroit puts on bright smile for auto show Argentina appeals court ruling on Central Bank chief Oil talks fail between Russia, Belarus: news agencies More Top Stories » ADVERTISEMENT Most Popular Most Viewed Most Recommended Battered Detroit puts on bright smile for auto show Britain faces toughest cuts for 20 years: Darling Formula One boss launches Saab rescue bid: reports Government hopes to cash in on devaluation in Venezuela Oil talks fail between Russia, Belarus: news agencies More Most Viewed » Beat the blues by going to bed early: study Huge tomb found at Egypt's Saqqara pyramid More Most Recommended » Elsewhere on Yahoo! 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