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ANALYSIS – Fragile wins, rising US rates point to faster tightening of Bank of Korea

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By Chunsik Yu

SEOUL, May 10 (Reuters)Last year, South Korea’s central bank outpaced the tightening curve, but is now facing pressure to move faster and further as weakening gains boost inflation and the U.S. Federal Reserve takes a big step toward raising rates.

The Bank of Korea, the first major Asian central bank to emerge from the crisis last August, is set to close a shrinking interest rate gap with the United States. If domestic rates are lower than in the US, capital outflows may put more pressure on the currency.

Investment banks and economists are beginning to change their assessment of how quickly BOK will raise rates, with some predicting that the key rate will rise to 2.50% by the end of the year from 1.50% now.

Governor Ri Chang He, who is considered less hawkish than his predecessor, will chair his first political meeting this month when factors such as the war between Russia and Ukraine make it difficult to predict when inflation will eventually cool down.

“Inflation has repeatedly exceeded expectations, which means that South Korea’s political rate has actually fallen in real terms, despite the recent rise,” said JPMorgan Chase Bank economist Sok Gil Park. At the end of the year, the bank raised its rate forecast to 2.50% from 2.00% earlier.

They won KRW = KFTC fell nearly 7% this year to about 1,273 per dollar after last year’s loss of nearly 9%. It looks like it will overcome a psychologically important barrier of 1,300 won for the first time since the 2008/09 global financial crisis.

Gains weakened on foreign sales of domestic stocks and deteriorating trade balances, among other factors that are not conducive to inflation. South Korea is heavily dependent on imports of energy, food and industrial components.

Imported prices have risen by 30% year-over-year over the past six months, according to official figures, which has boosted consumer inflation to a high of more than a decade in April from below 2.5% six months ago.

Along with inflation, central bank policies should also be concerned about the risk of capital outflows.

REJECTIVE BETTING RATES ARE DESTROYED

The surcharge for South Korea’s political rate above the U.S. Fed’s average point fell to 62.5 basis points from 112.5 points at the end of January.

The average point of the US target range by the end of the year, according to a Reuters poll, will reach 2.125%, while the base rate BOK will reach 2.00%.

“Politicians are closely monitoring the situation in terms of financial stability, in terms of capital flows,” said Chung Sung Tai, a senior economist at Samsung Securities, noting that gains are falling despite repeated talk of intervention.

Both the BC and the Fed will meet five times by the end of this year, but the latter is expected to raise the political rate with a higher margin than the former.

Falling profits have often raised investor concerns about the health of Asia’s fourth-largest economy, which barely escaped bankruptcy in the late 1990s and experienced an outflow of capital in 2008-2009.

The minutes of the BOC meeting on April 14 showed that a small majority of board members called for vigilance due to reduced profits and the risk of foreign capital outflows.

South Korea has said its economic fundamentals have improved significantly in recent years, but former Bank of Korea chief Kim Chung-soo told Reuters that capital flows remain a key issue for politicians.

Over the past 11 quarters, South Korea’s two main stock markets have had net sales overseas, with the exception of two, net sales for the 11 quarters of 63.05 trillion won ($ 49.5 billion). Foreign investors are selling this quarter as well.

“Can only a gap in rates cause an outflow of capital? Yes, and so we need to be very careful with the (negative) gap in rates,” said Kim, who was governor in 2010-2014.

(1 dollar = 1,274.01 won)

Political bets of the US and South Koreahttps://tmsnrt.rs/3M7DlOk

South Korea won the easinghttps://tmsnrt.rs/38bPnaH

(Edited by Jacqueline Wong)

((choonsik.yoo@thomsonreuters.com; +822 6936 1464;))

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.

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