South Korea may face accelerating inflation after Governor Lee Seong Tae left interest rates unchanged for a 13th month under political pressure, even as his economy is forecast to be one of the fastest-growing in Asia.

Lee, 65, who has had to accept a vice finance minister sitting in at meetings since January, kept rates at a record-low 2 percent on Thursday in his final decision. His successor is likely to take a “wait and see attitude” and may not move until after June, said Sharon Lam of Morgan Stanley in Seoul.
The Bank of Korea, forecast last year by BNP Paribas SA to become one of the world’s first central banks to raise rates, has instead fallen behind Australia, Vietnam and Malaysia. South Korea risks a Japan-style 1980s bubble by refusing to act early, said Young Sun Kwon, an economist at Nomura International Ltd.
“In order to quell inflation expectations, rising asset prices and credit growth, we believe the BOK will need to catch up by implementing an aggressive 125 basis points of hikes in the second half of 2010,” said Kwon, who is based in Hong Kong.
Finance Minister Yoon Jeung Hyun told reporters four days ago that “it is the government’s firm belief that it isn’t the right time for rate hikes,” repeating a call he has made since last year. The Bank of Korea said in a statement after Thursday’s decision that it “will maintain the accommodative policy stance for the time being.”
------------------‘Out of order’
Government guidance to stoke growth and boost employment has the potential to fuel consumer prices, said David Cohen of Action Economics in Singapore. “If they put so much pressure on the central bank that it fails to exercise necessary restraints, inflation could get out of order,” he said.
South Korean stocks have advanced on expectations for the economy to strengthen -- the International Monetary Fund forecasts it will outpace all but China and India among the world’s 15 largest economies over the next two years.
The rallies in stocks and the won suggest the markets are unconcerned by the failure to appoint a successor to Governor Lee less than three weeks before his term ends. In contrast, the Obama administration nominated Federal Reserve Chairman Ben S. Bernanke to a second term in August, five months before his term was up.
“The central bank, and its independence, are not that important,” said Kim Eugene, head of fixed income at Samsung Investment Trust Management Co., which manages 60 trillion won ($53 billion) of funds. “We pay attention to paradigm changes, especially since the financial crisis, that focus on fiscal coordination with the U.S. and other countries.”
------------------Stocks, currency
The benchmark Kospi stock index has climbed 4 percent this month. The won reached a seven-week high this week as foreigners added to their holdings of local shares. Bonds have also risen, sending benchmark five-year government bond yields down 17 basis points this month.
The Kospi index rose 0.03 percent to 1,657.16 at 10:52 a.m. in Seoul and the won gained 0.1 percent to 1,132.50 per dollar.
The first task of Lee’s successor will be to coordinate the withdrawal of monetary and fiscal policies implemented after the collapse of Lehman Brothers Holdings Inc. in September 2008, said Oh Suk Tae, an economist at SC First Bank Korea.
“We are in a critical moment in preparation to move from extraordinary policies back to normal levels,” Oh said “If the central bank fails to coordinate policies with the government, it may threaten the implementation of a sound exit strategy.”
------------ Call for hearings
President Lee Mung Bak appoints the governor without any review by lawmakers. While members of the opposition Democratic Party had called for the candidate to face hearings, they failed to press for a revision of the rules.
The appointments of the past two governors were announced on March 19 and March 23, less than two weeks before the incumbent’s term expired.
Speculation on Lee’s successor initially centered on 65- year-old Euh Yoon Dae, head of a presidential council to promote South Korea at international forums and a former member of the central bank’s monetary policy committee. He also attended the same university as President Lee. Last week, the Seoul-based Newsis news agency reported that former Finance Minister Kang Man Soo, 65, was the most likely candidate for governor.
Kang, President Lee’s finance minister after he took office in February 2008, came under fire at the time for pursing a weaker currency policy. He said the won had risen further than other Asian currencies, undermining the competitiveness of exporters. The currency lost 26 percent against the dollar in 2008, and 40 percent versus the yen.
-------------------OECD envoy
President Lee is also considering Kim Jong Chang, head of the Financial Supervisory Service, Park Cheul, a former deputy governor of the central bank, and Kim Choong Soo, an envoy to the Paris-based Organization for Economic Cooperation and Development, Dong-A Ilbo newspaper reported Feb. 9.
Kim Jong Chang, 62, was also a member of the monetary policy committee. Park Cheul is now chairman of Leading Investment & Securities Co.
“The market believes that the government is smart enough not to appoint someone whose views are so far from the consensus,” Cohen said. “Should the government upset the market with its appointment, long-term rates would rise, presumably contrary to the government’s economic objectives.”
Economists say the bank is likely to raise rates in the second half of this year as exports and industrial production remain strong.
(Source: Businessweek.com)