South Korea’s economic growth likely moderated in the fourth quarter as quickening inflation added pressure on the central bank to extend interest-rate increases.
Gross domestic product rose 0.4 percent in the three months through December from the third quarter, when it gained 0.7 percent, according to the median of 12 estimates in a Bloomberg News survey. The data are released at 8 a.m. in Seoul tomorrow.
President Lee Myung Bak has declared “war” on inflation, with the government announcing price controls and the central bank this month raising borrowing costs for the third time since the global financial crisis. The slowdown in the fourth quarter led by cooling investment will likely be temporary, analysts at DBS Group Holdings Ltd. said yesterday.
“Policy makers are focusing more on inflation now,” said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul. “The Bank of Korea is expected to keep normalizing rates as the economy will likely continue to post solid growth, supported by exports.”
The won rose 0.3 percent to 1,118.25 per dollar at the 3 p.m. close in Seoul, while the Kospi share index gained 0.2 percent, according to data compiled by Bloomberg. The currency has risen 2.9 percent in the past 12 months, the third-weakest advance in Asia, helping to support trade gains in the export- led economy.
The recovery in the U.S. economy may lead the central bank to increase its forecast for South Korean growth this year from the current estimate of 4.5 percent, Bank of Korea Governor Kim Choong Soo said on Jan. 19.
Annual Growth
Asia’s fourth-largest economy expanded 4.6 percent last quarter from a year earlier, according to the median estimate of 15 economists in another Bloomberg News survey. GDP increased at an annual rate of 4.4 percent in the three months through September.
Inflation will likely hover around 3.5 percent for an “extended period” driven by economic growth and rising raw material costs, Kim also said. The Bank of Korea targets consumer-price growth of 2 percent to 4 percent from 2010 through 2012.
The monetary authority raised the benchmark interest rate by a quarter of a percentage point this month to 2.75 percent, adding to similar moves in July and November from a record low. Borrowing costs have remained below inflation for a record 14 straight months, skewing incentives toward spending.
Inflation Threat
“We should revise our inflation forecast upwards, given our economic growth, the high level of inflation pressures in China and rising raw material costs,” one unnamed member of the Bank of Korea board said in minutes of the December interest-rate policy meeting released today. “Inflation may threaten our target ceiling, so we should act with a preemptive monetary policy.”
Some Asian counterparts have raised rates more aggressively. Thailand increased borrowing costs for the fourth time in seven months in January, while India boosted its benchmark rate to a two-year high today.
“The policy rate is unlikely to rise above 3.5 percent at the end of this year, as faster and larger increases would be a drag on domestic demand and slow economic growth, which the government expects to be 5 percent in 2011,” said Oh Suk Tae, an economist at SC First Bank Korea Ltd. in Seoul.
Exports rose for a 14th consecutive month in December. Overseas shipments are equivalent to about half the economy and boosted earnings last year at companies including Samsung Electronics Co., Asia’s biggest maker of semiconductors, flat screens and mobile phones.
Capital Inflows
South Korea has joined emerging markets from Thailand to Brazil in striving to counter foreign capital inflows and pare currency gains. The nation has revived taxes on overseas investors in domestic government bonds and tightened scrutiny of trading in foreign-currency derivatives.
Officials may tolerate higher gains in the won to offset rising prices for imported goods such as crude oil and food grains, SC First Bank’s Oh said.
The government on Jan. 13 announced plans to reduce import tariffs on some food items and freeze the cost of utilities, including electricity and gas. The administration also said it will ask steelmakers to refrain from raising prices.
Source: http://www.bloomberg.com
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