beyondbrics

No sudden moves from the Bank of Korea on Thursday, which held the base rate at 3.25 per cent for an eighth straight month.

It looks a sensible decision. South Korea’s all-important exports may have suffered an alarming drop in January but it is not yet time to pull the emergency cord. Inflation is still lurking in the wings and Kim Choong-soo, the central bank governor, is still sounding hawkish about combating risks.

Annual inflation in Asia’s fourth biggest economy slipped to 3.4 per cent in December after running at running at 4.2 per cent in November and December. The central bank is wisely not celebrating this dip beneath the 4 per cent target but warning that prices could lurch back upwards. January’s drop appears to be flattered by the year-earlier comparison: inflation expectations for the whole year remain above 4 per cent.

Iran is the big worry as Korea gets about 10 per cent of its crude from the Islamic Republic. Lee Myung-bak, president, is sounding out alternative suppliers but that will do little to ward against a global price shock.

The year ahead is looking mixed for the world’s seventh biggest exporter. The eurozone may be unable to produce a credible cure for its problems but the US economy is showing signs of rising from its sickbed. South Korean exports surprising slumped 6.6 per cent in January compared with a year earlier, after a 10.8 per cent rise in December. Shipments to the US and China are healthy but those to crisis-racked Europe crashed 45 per cent in January.

Naturally, Seoul has room to give the economy a shot in the arm with an interest rate cut but it makes sense to wait until the position with Iran, Greece and the US recovery becomes clearer. HSBC predicts the global situation means the central bank will slice 25 basis points next month. Goldman Sachs reckons Seoul can get through 2012 without a cut.

Glenn Levine, senior economist at Moody’s Analytics, predicts two small cuts in the second quarter. As he wrote in a research note:

The global outlook has probably improved a little in recent weeks, but the near term growth outlook for Korea remains quite weak and we expect to see production slow to a crawl through the opening six months of 2012. Exports have been the main driver of the current slowdown, although the domestic economy is also starting to soften and could do with some monetary stimulus. Consumer demand looks weaker and the property market, which recovered a little through the middle of 2011, has begun to contract again.

Indeed, some of this weakness should reduce the inflation pressures and free up the bank to stimulate the economy through cautious cuts.

Related reading:
Asian inflation: an awkward fall, beyondbrics
S Korea: inflation back on the radar, beyondbrics