News and Finance

Bank of Korea Governor Lee Seong Tae said inflation will probably remain elevated for a significant period, an indication he may keep interest rates at an eight-year high this year.

The central bank left the seven-day repurchase rate at 5.25 percent in Seoul earlier today, as forecast by all 23 economists surveyed by Bloomberg News. The bank raised borrowing costs in August for the first time in 12 months.

Lee said today consumer prices may exceed the bank's 5.3 percent forecast in the second half, stoked by a weaker won and increases in power costs. South Korea's policy makers must balance the inflation threat against evidence of a deepening slowdown in the economy, which expanded at the weakest pace in more than a year last quarter as consumers cut spending.

“The Bank of Korea maintains its tightening bias in light of inflation risks,'' said Frederic Neumann, an economist at HSBC Holdings Plc in Hong Kong. “We see rates on hold for the time being.''

The government said yesterday it will raise electricity prices by 5 percent next month and gas prices in cities by 7.8 percent on Sept. 19 to help recoup higher production costs.

Consumer prices increased 5.6 percent in August from a year earlier, moderating from July's 10-year high of 5.9 percent. It still marked the 10th consecutive breach of the central bank's 2.5 percent to 3.5 percent inflation target.

“To say it simply, the inflation situation hasn't improved much,'' Governor Lee told reporters today.

Currency Decline

The Kospi index of stocks fell 1.2 percent to 1,446.90 at 1 p.m. in Seoul, taking this year's drop to 23 percent. The won declined 1.1 percent to 1,107.90 against the dollar. The yield on the five-year government bond slipped 4 basis points to 5.73 percent payday loan online.

The won's 16 percent slump this year, Asia's worst performer, has fanned inflation pressures by driving up the cost of imported goods. The currency has declined as investors sold the nation's stocks and bonds because of the dimming outlook for economic growth and signs of increased overseas debt.

Economists at Goldman Sachs Group Inc. and UBS AG predict the central bank will have to raise interest rates this year to stem the won's decline. Each 8 percent drop in the won adds 1.6 percentage points to the inflation rate, according to Goldman.

“We expect the central bank to hike by 25 basis points as early as the next policy meeting,'' said Eva Yi, an economist at Goldman Sachs in Hong Kong. “The sharp depreciation of the won has tilted the risks decisively towards inflation for the BOK, despite prospects of continued weakening in domestic demand.''

Economic Slowdown

In contrast, fifteen of 20 economists surveyed this week forecast rates will be kept unchanged for the rest of 2008 because higher borrowing costs would stifle an already-slowing economy as consumers, struggling with record debt levels, cut spending.

“Another rate hike would do more harm than good by further damping domestic demand,'' said Chun Chong Woo, an economist at SC First Bank Korea Ltd. in Seoul. “The won could weaken more if the economy cools faster than expected.''

The economy grew 4.8 percent in the second quarter from a year ago, the slowest pace in more than a year. Household spending fell for the first time in four years as rising living costs prompted consumers to cut discretionary purchases.

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