South Korea may raise interest rates less than previously forecast this year, Goldman Sachs Group Inc. and JPMorgan Chase & Co. said after the central bank kept its benchmark rate unchanged for an 11th straight month Friday.

Governor Lee Seong Tae maintained the seven-day repurchase rate at a record-low 2 percent, according to a Bank of Korea statement in Seoul.
The decision was expected by 13 of 14 economists in a Bloomberg News survey. One predicted a quarter- point increase.
Friday’s policy meeting was attended by Vice Finance Minister Hur Kyung Wook, the first appearance at a policy- setting meeting by a vice minister since 1999. The government, which says it’s too early for South Korea to unwind policy measures taken to stimulate the economy, said Thursday that Hur would attend the meetings to “strengthen policy coordination.”
“The environment for the BOK to raise interest rates has become more complicated with the government adding more pressure on the central bank,” said Kwon Young Sun, an economist at Nomura International Ltd. in Hong Kong. “Looking ahead, for the actual BOK rate increase to take place, there’ll be lots of difficulties due to rising political pressure.”
JPMorgan pared expectations for higher interest rates this year after Friday’s decision, removing forecasts for two increases between March and September and predicting a total gain of 0.5 percentage points in borrowing costs for 2010. Goldman Sachs now estimates that the Bank of Korea will raise rates in the third quarter rather than the first three months.
---------Possible criticism
“The government’s move to attend the monetary policy committee meeting showed that its preference for a low interest rate policy is strong enough to risk the possible criticism that the BOK’s independence gets hurt,” Lim Jiwon, an economist at JPMorgan in Seoul, said in a report Friday.
Governor Lee declined to comment on Hur’s attendance Friday, saying the “seven-member policy board makes the policy decision.” The vice minister has no voting rights in the monetary policy meeting.
Finance Minister Yoon Jeung Hyun has said it’s too early for South Korea to pursue an “exit strategy” as risks remain. The central bank said Friday it will “maintain the accommodative policy stance for the time being in such a way as to help sustain the trend of recovery in economic activity.”
The end of Governor Lee’s term in March weakens the governor’s role on the policy board and a regional election in June “may provide the government with an incentive to maintain an accommodative policy longer than the BOK may deem warranted,” Nomura’s Kwon said.
-----------Stimulus measures
South Korea’s government expanded spending and accelerated outlays to cushion the economy from the worst global recession since World War II. The central bank cut the benchmark rate by 3.25 percentage points between October 2008 and February 2009, the most aggressive easing since it began setting a policy rate a decade ago.
Governor Lee on Dec. 10 said the central bank should not wait too long before gradually raising interest rates, provided the recovery sustains momentum. He said the bank will adjust its monetary policy “at an appropriate pace,” while taking into consideration the economy and financial conditions.
There are growing signs that Asia’s fourth-largest economy is picking up speed. Exports, which make up about half of gross domestic product, rose at the fastest pace in 17 months in December and factory output rebounded in November. President Lee Myung Bak last week said GDP may expand more than 5 percent in 2010, which would be the most in three years.
--------Uncertainties remain
“Domestic economic activity has continued on a recovering trend, which is expected to be maintained,” the Bank of Korea said in its statement today. Still, the central bank said uncertainties remained “as to the economic-growth path due to the risk of delay in a fully fledged recovery of the major advanced economies.”
Strengthening growth in the South Korean economy saw the benchmark Kospi stock index climb 50 percent in 2009 while the currency rose 8 percent against the dollar. The government said it will allocate 70 percent of its expenditure to the first half of this year, to help support the recovery.
The Kospi rose 0.7 percent to 1,695.26 in SeoulFrioday while the won gained for a sixth day to 1,130.50 against the dollar.
Samsung Electronics Co., Asia’s biggest maker of semiconductors, flat screens and mobile phones, said yesterday it posted a preliminary fourth-quarter operating profit of about 3.7 trillion won ($3.3 billion), compared with a loss of 740 billion won a year earlier.
--------Strong upswing
“The need for emergency rate levels in Korea has long since passed,” said Kevin Grice, an economist at Capital Economics Ltd. in London. “The GDP upswing is strong and should stay strong for a while at least.” Elsewhere in the Asia-Pacific region, Reserve Bank of Australia Governor Glenn Stevens in December raised the benchmark interest rate by a quarter point to 3.75 percent. Vietnam’s central bank rate was raised to 8 percent from 7 percent as of Dec. 1.
Bank of Korea Governor Lee said a rate increase doesn’t necessarily mean a policy tightening, and maintained his view that there’s a gap between “the current rate at 2 percent and rates after normalization.”
“We have no differences with the government in recognition of the economy in the bigger picture,” Lee said. “However, we can’t be the same in every little detail.”
The central bank in November widened its inflation target range for the next three years, giving room for policy makers to keep borrowing costs low. The goal for 2010 to 2012 will be 3 percent, plus or minus 1 percent, it said on Nov. 26. The current target is 3 percent, plus or minus 0.5 percent.
(Source:Bloomberg)