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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 Weekend Edition Singapore Asia Pacific World Bank of Korea under pressure to tighten this week Reuters - 2 hours 24 minutes ago Send IM Story Print By Yoo Choonsik SEOUL, March 8 - The Bank of Korea is under mounting pressure to raise interest rates this week not simply to cool inflation expectations, but more importantly to win back investors' confidence in its independence. A slew of indicators released last week pointed to Asia's fourth-largest economy picking up momentum after experiencing a slowdown late last year and commodities-led inflation spreading to other economic sectors. Uncertainty caused by turmoil in the Middle East and North Africa remains a source of concern for South Korea's economy and the finance ministry highlighted that concern on Tuesday in its "Green Book" economic report. "Recovery in the world economy is improving but uncertainty has increased due to such factors as the political unrest in the Middle East, possible monetary policy tightening in emerging economies and a possible prolonging of Europe's fiscal crisis," it said. Money market rates, however, suggest traders are pricing in high chances of an interest rate rise at the March 10 meeting and 14 out of 16 analysts polled by Reuters bet on a quarter point rise. "Bond prices rose on expectations the unrest in the Middle East would affect the Bank of Korea's policy, but I have little doubt that rates will be raised this time," said Kong Dong-rak, a fixed-income analyst at Taurus Investment & Securities. South Korean bond traders polled in a separate survey were more cautious though, with just over 52 percent expecting a move. The Bank of Korea is independent by law from outside influence including the government, but its recent policy decisions repeatedly confounded market expectations and raised doubts about its credibility and resolve to fight inflation. It raised the policy interest rate by 75 basis points in three steps between July last year and January this year, but policymakers and analysts agree its benchmark rate of 2.75 percent is still too low for an economy that grew at its fastest clip in eight years in 2010 and keeps going strongly. Annual inflation rose to a two-year high in February, well above the central bank's target, and surveys show it could quicken further before settling back. February exports rose more than expected and January factory production soared. GOVERNMENT WIELDS INFLUENCE Housing prices rose by their quickest monthly pace in nearly three years in February while inflation-adjusted borrowing rates remain negative even for some companies. Three-month KORIBOR was quoted at 3.23 percent on Tuesday. In the won forward starting swaps market, the 3-month rates swap on a contract starting after 3 months was quoted at 3.68 percent. This implies the market is pricing in 45 basis points of tightening by mid-June. President Lee Myung-bak's government has identified inflation as one of this year's biggest challenges and has announced a set of measures to curb price growth, such as tariff cuts on some imports and a freeze on electricity charges. But it also fears that raising rates too fast could cool the economy too much and is seen as having successfully pressured the Bank of Korea to keep monetary policy loose for a much longer period than markets had expected. The government is worried that faster tightening would hit heavily-indebted households and hurt exporters by boosting the won sharply. Analysts do not expect foreign investors to pull out even if the Bank of Korea holds fire because of its strong economic and financial fundamentals, but say a further delay could require more aggressive action in the future. "The Libya elements wouldn't play a big role. But if (the central bank) doesn't raise this time and inflation expectations tick up, then it will have to raise more quickly ," said Erik Lueth, an economist at Royal Bank of Scotland in Hong Kong. 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