S.Korea’s central bank holds interest rates flat

South Korea’s central bank left interest rates on hold on Thursday, setting in all likelihood a precedent for Asian policymakers forced to respond to the global economic slump and briefly halt their battle against inflation. The Bank of Korea was unambiguous in its statement, saying that while inflation would remain high, the downside risks to growth had increased. Even market analysts, who have been wrong-footed by this central bank consistently this year, had seen this coming through the past weeks as they watched a deepening debt crisis in the euro zone and rapid deterioration in prospects for the US economy. Heavy losses in global financial markets in recent sessions have only added to the case for central banks to put any further tightening plans on hold for now. “It can be viewed as a temporary pause,” said Park Hee-Chan, an economist with Mirae Securities. “Although there is big economic uncertainty lying ahead, from what we can see the current situation is not that desperate or dangerous.” The past week’s market turbulence, which has seen the Korean stock market tumble 18 per cent so far this month, gives authorities a valid excuse to refrain from tightening policy. Norway did likewise this week as did Indonesia, although the latter is in a relatively healthier growth-inflation situation.Some economists worried that Korea may have missed an opportunity to raise rates. The policy rate has been steady at 3.25 per cent since June, painfully below inflation running at an annual pace of 4.7 per cent. But with core inflation also uncomfortably high at 3.8 per cent, policy rates certainly need to be higher.Without doubt, the policy terrain for Korea and Asia’s other high-growth economies has become extremely tricky after the US Federal Reserve pledged this week to keep its policy rates near zero for at least two years.At worst, Asian policymakers face a long period of extremely weak demand abroad for their exports, a drying up of foreign credit and possibly another round of heavy monetary stimulus by the Fed.At home, they have to contend with high and still rising core inflation, tight capacity and labour markets, and yet also question marks about overall growth. Alongside that emerges the risk that these central banks do a volte-face on monetary tightening right now, only to find the remnants of still strong price pressures manifest themselves in uncomfortable ways in the economy. Even under a base-case scenario in which the eurozone slows considerably and the US economy cools but avoids a recession, it is possible several Asian countries that ought to be raising rates will instead hit the pause button policy, said Yougesh Khatri, economist with Nomura Securities.The Philippine central bank governor hinted as much this week. “Even as the surge in flows could continue to complicate monetary policy, the specific timeframe provided by the Fed gives us monetary policy space,” Governor Amando Tetangco said.“What we need to work double time on is strengthening domestic demand to make up for potentially slower trade, given the more negative growth outlook in the US and Europe.” That primarily is the worry: that the battle against inflation will be compromised in some of these countries, particularly those where the political influence is heavy. The odds are stacking up against mostly export-dependent Asia. Wall Street economists put the odds of a US recession at one-in-three, while a Reuters poll of 200 economists forecast a 25 per cent chance of a US recession and a 30 per cent possibility the Fed will launch a third round of quantitative easing. Commodity prices have fallen. The Reuters-Jefferies CRB index , a global commodities benchmark, has slid 7 per cent this month. That should provide quite a bit of respite to Asia, where food and fuel can make up as much as 40 per cent of the consumer price basket. But plenty of central banks are in a quandary. Australia’s central bank faces high underlying inflationary pressures residing alongside weakness in sections of its economy. From / Gulf Today