InfoAnda - SCENARIOS-Bank of Korea could signal tightening shift

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Yahoo! My Yahoo! Mail Yahoo! Search Search: Sign InNew User? Sign Up News Home - Help Navigation Primary Navigation Home Singapore Asia Pacific World Business Entertainment Sports Technology Top Stories Most Popular Secondary Navigation Singapore Asia Pacific World Search Search: SCENARIOS-Bank of Korea could signal tightening shift Reuters - Wednesday, September 9 By Seo Eun-kyung and Yoo Choonsik ADVERTISEMENT SEOUL, Sept 9 - South Korea's central bank looks certain to keep its main interest rate on hold on Thursday but markets will be on alert for signals that it may raise rates soon given evidence of faster-than-expected economic recovery. All 14 analysts surveyed by Reuters forecast the Bank of Korea would keep the base rate <KROCRT=ECI> on hold at a record low of 2.0 percent on Thursday, but expectations for a rise in 2009 grew significantly from a month ago. [ID:nSEO252673] Following is a summary of possible scenarios for the central bank's policy meeting and likely market responses. HIGHLIGHTS STRENGTH OF RECOVERY, STRESSES CONCERNS OVER REAL ESTATE PRICES The central bank has said Asia's fourth-largest economy remained on a stronger-than-expected recovery path thanks to the improving domestic and global environment. At its last meeting, however, it pointed out that uncertainty remained about the growth outlook, mainly because of a risk of a delayed recovery in major economies. The Bank of Korea is expected to reiterate its improved assessment of growth prospects and may send a clear signal that it is more confident about the Korean economy by dropping the reference to uncertainty. The central bank has also repeatedly said that while overall consumer price inflation was subdued, rising property prices had to be watched. If it becomes more explicit in its warnings about a threat of a housing bubble it can be a sign that it may soon consider raising rates. It may also remove or modify its stock phrase from the last three statements that it would "accomodative policy stance for the time being," or add a caveat that policy rates would have to be brought back to more "normal" levels over time, siding with the suggestion of finance ministry's research arm on Tuesday. [ID:nSEO237935] * Probability: high * Market reaction: A consistently more upbeat message on the economy and warnings on asset prices are likely to hit government bonds, prompting investors to bring forward the timing of an expected rate rise to late 2009 from early 2010, which is a majority view now. (For a related graphic, double-click: http://graphics.thomsonreuters.com/099/KR_RTS0909.gif) CONFIDENT ON GROWTH, BUT NOTE HIGH CORPORATE LENDING RATES The central bank may voice its optimism about the economy, but say that market lending rates have not come down as much as its official benchmark and keep a line from its previous statements expressing concern about credit risk and short-term focus of market funds. It could also note both subdued headline inflation and rising property prices, but not go beyond past statements that housing price and mortgage developments warranted attention. Governor Lee Seong-tae could also reiterate that in fact some of the stimulus measures were being already phased out. Probability: medium Market reaction: A balanced message should have limited impact, maintaining the status quo with most market players betting that gradual tightening will start in the first quarter of 2010 and a sizeable minority expecting the first cautious move probably in November. STILL CAUTIOUS ON GROWTH OUTLOOK, PLAYS DOWN HOUSE PRICES The central bank could retain its message that despite data showing Asia's fourth-largest economy was recovering faster than initially thought uncertainty remained about the outlook and that it needed more evidence that the economy was back on track. It might also point out that rates at which companies were borrowing remained relatively high. It could, as some analysts say, stress that property prices were still nowhere near 2006 highs, which set off its last tightening campaign, and cite latest data that suggested administrative measures to slow mortgage lending growth were bearing some fruit. * Probability: low * Market reaction: Bonds would rally and the won could weaken as such a "dovish" message would prompt market players to unwind their bets that official rates would go up in the next few months. PHASE OUT ONE OF EMERGENCY STEPS, MENTION CASH RESERVES Governor Lee said last month that some of emergency steps introduced to cushion the impact of the global financial crisis have already been unwound. Lee cited repayment of the central bank's special dollar loans and the expiry of a one-year programme of bank bond buying. This time, the central bank could, for example, announce plans to reduce the amount of money it lent to funds set up to recapitalise domestic banks and stabilise the bond market. It could also point out that changes to cash reserve requirements remained one of the tools to control liquidity, even if it was seen not as efficient as in the past. * Probability: low * Market reaction: Short term bonds would get support as bets on aggressive rate tightening would be scaled back, while money market rates could rise if a rise in cash reserves were flagged as an option. (Additional reporting by Vidya Ranganathan; Editing by Jonathan Thatcher and Tomasz Janowski) Email Story IM Story Printable View Blog This Sign in to recommend this article » 0 users recommend Related Articles: Business Stocks open lower as commodities rallyAP - 2 hours 22 minutes ago OPEC committee recommends no oil production cutAP - 2 hours 29 minutes ago Oil hovers above $71 amid weakening US dollarAP - 2 hours 29 minutes ago Sun Healthcare Group cuts 2009 outlookAP - 2 hours 40 minutes ago RPT-Berlin's electronics fair pushes greener futureReuters - 2 hours 38 minutes ago Most Popular – Business Viewed Giant statues reveal red hat secrets: study Hershey considers rival Cadbury bid: report Anti-piracy equipment dazzles defence fair New Alzheimer's gene link discovered Economy outlook "better" than expected: bankers View Complete List » Search: Home Singapore Asia Pacific World Business Entertainment Sports Technology Top Stories Most Popular Copyright © 2009 Yahoo! 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