Korea Rate Outlook Shifts as Data Point To Tighter Control [WSJ]
By JUNG-AH LEE
June 20, 2006; Page A12
SEOUL, South Korea -- A money-supply indicator that South Korea's central bank started publishing this month could foreshadow tighter monetary policy.
The data show there is more money in the banking system and the amount is growing more rapidly than indicated by M3, a broad money-supply measure that has been used as a benchmark. That suggests the inflation rate -- which was 2% for May -- could rise more than expected. As a result, many economists are predicting the Bank of Korea could raise interest rates more than they had thought.
Some economists say the L series, or "Liquidity Aggregates," data may not be a good indicator of inflation because the data's scope is too broad to show where demand for money is coming from. While many economists said they have shifted their policy expectations to reflect a more hawkish policy by the central bank, for some the change has been colored more by recent events and comments from officials than the data change.
The Bank of Korea raised its call-rate target by a quarter-point to 4.25% earlier this month and suggested its tightening might continue. Many economists had expected the central bank to say it was nearly done with the tightening that started last October.
In a poll before the June 8 meeting, eight of 13 economists expected the central bank to stand pat for the rest of the year. Only three of 11 economists surveyed now expect no policy change for the rest of 2006.
The L money-supply measure includes M3 plus bonds issued by nonfinancial institutions such as the government and companies, which account for 15.6% of the total. The data showed the L money supply at the end of April was about 7.6% higher than a year earlier. Outstanding M3 at the end of April was up 6.9% from a year earlier.
Lim Ji Won, an economist at J.P. Morgan, said the central bank may use the L indicator to show that the banking system has more liquidity than previously thought, adding support for its tightening stance. She said the bank feels "uncomfortable" with using M3 figures, as the data don't show the exact amount of liquidity in the system.
Westpac Banking economist Sean Callow said he agrees with that view and has revised his expectations on official interest rates. Mr. Callow, who had forecast a quarter-point increase in the policy rate during the third quarter, now expects the central bank to increase the rate twice more this year, to 4.75%.
He noted that Bank of Korea officials recently warned that keeping interest rates too low for too long can inflate asset prices, but he said his revision also was due to a surge in house prices, continued low unemployment, rising U.S. interest rates and high oil prices. |
