Wednesday, August 29, 2007

Industrial Output Rises Rapidly

From Bloomberg today:

South Korean Factory Output Jumps on Chips, Phones

South Korea's industrial production rose seven times faster than expected in July as companies increased output of semiconductors and mobile phones.

Manufacturing grew 2.1 percent from June, when it gained 1.9 percent, the statistics office said today in Gwacheon, South Korea. The median forecast in a Bloomberg News survey of 11 economists was for a 0.3 percent increase.

An increase in output may help to protect Asia's third- largest economy from a slowdown in consumer spending after the benchmark stock index fell from a record and the central bank raised interest rates twice in two months. Overseas shipments, which account for about 40 percent of the $887 billion economy, rose at the fastest pace in six months in July.

``Upbeat export momentum will keep the economy chugging along,'' said Kim Jae Eun, an economist at SK Securities Co. in Seoul. ``The economic recovery will remain unscathed for the moment.''

The won closed at 942 per dollar at 3 p.m. in Seoul, down 0.2 percent. The yield on three-year government bonds fell 2 basis points at 5.34 percent.

From a year earlier, industrial output climbed 14.3 percent in July, the fastest pace in 10 months, up from a 7.7 percent increase in June.

Production last year was depressed by strikes at Hyundai Motor Co. and its affiliate Kia Motors Corp. Auto shipments fell almost a third in July 2006. Car production jumped 38.1 percent in July from a year ago. From June, auto production declined 8.4 percent in July, today's report showed.

Semiconductors, Mobile Phones

Production of semiconductors rose 4.9 percent from June and mobile-phone output climbed 9.5 percent, both on rising demand from overseas buyers, today's report showed.

Semiconductors and mobile phone are ``two important sectors in assessing the impact of any U.S. slowdown on Asia,'' said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. Mobile-phone demand shows an ``ongoing strength in consumer spending'' as the appetite for new model handsets tend to be discretionary.

Sales of consumer goods rose 1.6 percent from June. Corporate investment on facilities climbed 1.3 percent from a year ago.

Factory output may slow in coming months if South Koreans spend less after the central bank raised interest rates twice this year and local stock prices declined.

The benchmark Kospi stock index has dropped 8.9 percent since setting a record on July 25 on concern a U.S. housing recession would spread and slow global growth.

``The clear risk to what is a very optimistic outlook on South Korea at present is the increased likelihood of a more substantial slowing in U.S. economic activity,'' Maguire said.

The Bank of Korea lifted borrowing costs for a second time in two months on Aug. 9, bringing the benchmark rate to a six- year high.

Construction orders dropped 14.9 percent in July from a year ago, as there were fewer orders to build homes.

Wednesday, August 8, 2007

Bank of Korea Raises Rates

The Financial Times this morning:

Bank of Korea surprises with rate increase

By Song Jung-a in Seoul

Published: August 9 2007 06:48 | Last updated: August 9 2007 06:48

The Bank of Korea unexpectedly raised its benchmark interest rate by a quarter point to a six-year high of 5 per cent on Thursday to absorb excessive market liquidity and contain growing inflationary pressure.

The rate hike, the first ever to follow just a month after a previous hike, surprised South Korea’s financial markets, driving bond prices down and pushing the won higher.

Lee Seong-tae, the BoK governor, said strong economic growth and increasing price pressure prompted the central bank to raise interest rates again as financial markets showed signs of instability amid explosive growth in the money supply.

South Korea’s economy grew 4.9 per cent in the second quarter, the fastest pace in over a year, beating economists’ expectations. The strong growth was propelled by robust exports, which jumped 20 per cent in July from a year earlier, and industrial output rose 7.6 per cent in June.

Mr Lee hinted that further tightening is unlikely this year, saying that ”the degree of financial accommodation will be markedly reduced” with the two consecutive rate hikes. And he cautioned that inflationary pressure would increase in the second half, due to a recovery in domestic demand and higher oil prices.

Bank loans to households increased by Won1,770bn in July from June, the biggest monthly gain in five months. Lending to small and mid-sized companies rose by Won3,100bn in July, increasing the risk of an asset bubble. Inflation remained stable at 2.5 per cent but Mr Lee predicted that upward pressure would grow in coming months.

Kwon O-kyu, the finance minister, supported the BoK’s move, saying the economy was showing ”clearer signs” of a recovery on the back of stronger consumption and brisk exports. ”The economic recovery, which started gradually from the beginning of the year, is becoming clearer,” he told reporters.

Both Mr Lee and Mr Kwon maintained their upbeat economic outlook, saying that the upward trend will continue in the second half, although higher oil prices and the stronger won still pose risks to economic growth. The BoK has forecast Asia’s third-largest economy to grow 4.5 per cent this year after expanding by 5 per cent last year.

Financial markets showed a sharp reaction to the surprise rate hike Thursday. The yield on the benchmark five-year government bond surged 7 basis points to a two-week high of 5.4 per cent and the won rose 0.2 per cent to 922.15 against the dollar in morning trading. The Kospi benchmark stock index pared gains to 0.6 per cent after being up as much as 1.3 per cent before the announcement.

and Bloomberg:

Bank of Korea Unexpectedly Raises Key Rate to 5%

The Bank of Korea unexpectedly raised its benchmark interest rate for a second time in as many months to curb lending that may fuel asset-price bubbles.

Governor Lee Seong Tae and his board increased the overnight call rate by a quarter point to 5 percent, the highest since July 2001, the central bank said in Seoul today. None of the 14 economists surveyed by Bloomberg News predicted the move.

Finance Minister Kwon Okyu said the decision was ``appropriate.'' He and Lee want to avoid a repeat of a debt bubble that burst in 2004 and stunted economic growth. Lending to households rose at the fastest pace in five months in July.

``The tipping point is likely to have been the explosion in household borrowing over July,'' said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. ``The crippling debt overhang of 2001-03 remains clear in the mind of the central bank.''

In 2004, borrowers who had used credit cards to amass debt defaulted in record numbers, slowing the economy's expansion.

The yield on the benchmark five-year government bond surged 10 basis points to 5.43 percent as of 1:50 p.m. in Seoul, the biggest jump since October 2005. The won rose 0.2 percent to 922.32 per dollar. The Kospi stock index pared gains to 0.3 percent after rising as much as 1.3 percent before the decision.

Economists had expected the bank to keep rates on hold to assess the effect of the July increase and monitor whether a U.S. subprime mortgage slump will affect global growth. Today's move was the bank's first-ever back-to-back rate increase.

Urgent Task

``Concerns over soaring money growth outweighed U.S. sub- prime woes,'' said Kim Jae Eun, an economist at SK Securities Co. in Seoul. ``The most urgent task for the Bank of Korea is to put a lid on rising money growth and ensure fast growth won't cause asset-price bubbles and inflation.''

The Bank of Korea also raised the rate on so-called aggregate loans, which are offered to local banks to spur lending to smaller firms, to 3.25 percent from 3 percent.

``With a series of accumulated rate hikes, the degree of monetary easing that was supportive of the economic recovery has lessened considerably,'' Governor Lee told reporters in Seoul.

Lending by commercial banks to households surged 1.77 trillion won ($1.9 billion) in July from June, the central bank said yesterday. Loans to small and mid-sized businesses rose 3.1 trillion won, slowing from June's 8.1 trillion won gain, which was the biggest increase since December 2000.

Further Moves

``Given the hawkish tone of the central bank, a further tightening move before year-end cannot be ruled out,'' said Frederic Neumann, an economist with HSBC Markets Ltd. in Singapore. ``However, this will become dependent on trends in credit and liquidity growth over the next few months.''

Neumann maintained his prediction that lending and money supply will slow in response to credit-tightening measures and the key rate will stay at 5 percent for the rest of the year.

Central banks globally are battling to curb inflation as booming world economic growth forces up food and commodity prices. Australia raised its key rate to an 11-year high of 6.5 percent yesterday, and England, Canada and New Zealand all increased borrowing costs in the past month. European Central Bank President Jean-Claude Trichet said last week he may raise his benchmark rate from 4 percent next month.

South Korea's consumer-price inflation advanced 0.4 percent in July from June, when it was unchanged. The annual inflation rate remained at 2.5 percent. Consumer prices will climb 2.6 percent in the second half of 2007, accelerating from 2.2 percent in the first half, the central bank said last month.

Economic Revival

Growing signs of economic revival strengthened the case for a rate increase.

Consumer confidence climbed to the highest in 16 months in July, the National Statistical Office said today, signaling shoppers may help to sustain the economy's longest expansion in a decade. Consumer spending is showing a mild recovery, the central bank said today.

The economy expanded 1.7 percent in the three months to June 30, the quickest rate in 18 months. Exports gained 20 percent in July, while in June, service companies expanded at the quickest rate in almost five years and industrial production climbed for a third month.

``The Bank of Korea might think that hiking rates sooner than expected gives them room for a rainy day in the future,'' said Kwon Young Sun, an economist with Lehman Brothers Inc. in Hong Kong. ``Without any significant upside risks to growth, the bank should stay on hold for the rest of the year.''

Today's rate increase came even as South Korea's currency, the won, has strengthened. The won has surged to a 10-year high against the yen, the currency of its major export competitor.

Governor Lee said today that the won's strength will have little effect on easing inflationary pressure. Finance Minister Kwon said last week that the yen's weakness isn't justified. Borrowing in yen to buy higher-yielding assets -- the so-called carry trade -- threatens to destabilize global markets, he said.

The central bank last week introduced measures to restrict companies from borrowing in foreign currencies as it seeks to reduce the won's gains.

Borrowing in S Korea

In Bloomberg today:

South Korea's Household Debt Grows at Fastest Pace in 5 Months

By Kim Kyoungwha

Aug. 8 (Bloomberg) -- South Korea's household debt grew at the fastest pace in five months in July, increasing pressure on the central bank to raise interest rates for a second time this year.

Lending by commercial banks to households surged 1.77 trillion won ($1.9 billion) from the previous month, the biggest rise since February, the Bank of Korea said in Seoul today. The gain was more than double a 776 billion won increase in June.

A resurgence in household borrowing may persuade central bank Governor Lee Seong Tae and his board to increase the benchmark interest rate from a six-year high. Policy makers raised the key rate to 4.75 percent last month on concern a jump in lending may spur inflation as economic growth accelerates.

Lee and his policy makers meet at 9 a.m. in Seoul tomorrow and an interest-rate decision is due before 11 a.m.

All 14 economists surveyed by Bloomberg News expect the bank will leave the rate at 4.75 percent. Still, nine of 14 analysts see a quarter-point increase to 5 percent later this year.

Lending to small and mid-sized businesses rose by 3.1 trillion won in July, slowing from June's 8.1 trillion won gain, which was the biggest monthly increase since the bank began compiling the figures in December 2000.

Mortgage lending advanced 127.4 billion in July, after climbing 710 billion won in June, today's report showed.

Lee and Finance Minister Kwon Okyu say that excessive lending and money-supply growth could push up prices and result in an asset bubble, undermining the economy's longest expansion in a decade.

In an effort to slow borrowing, the central bank on June 21 reduced the funds it makes available for loans to small businesses for the first time in six months. Last year, the bank ordered commercial lenders to hold more money as reserves.

Lf, the broadest measure of the money supply and formerly known as M3, rose an estimated 10.4 percent in June from May, the central bank said, citing preliminary figures. Lf stands for liquidity of financial institutions.