South Korea's consumer sentiment rose for a fifth month to a seven-year high in August, reinforcing investors' opinion that Asia's fourth-largest economy could be among the first country's to raise interest rates. Stock and currency traders welcomed the latest sign of optimism, but President Lee Myung-bak and his finance minister called for caution and reaffirmed it was not time yet to unwind the support put in place since late last year.
"The government is dealing with (the economy) very carefully and I think it is premature to implement an exit strategy," a statement from the presidential office quoted Lee as saying at a meeting with executives and scholars on Wednesday. "It seems that major countries are of the opinion that exit strategies should be discussed during the first half of next year at the earliest."
Analysts said the sentiment data supported their view that the Bank of Korea would start to raise interest rates soon, and added the president's remarks appeared directed towards the public rather than central bankers. "Our view is that interest rates will start to be raised from the first quarter of next year to pre-empt inflation expectations," said Park Sang-hyun, an economist at HI Investment & Securities.
"The president's remarks could influence the public perception about the rate policy direction but I don't think the Bank of Korea's policy will be greatly affected." The central bank's consumer sentiment index - which measures sentiment in six categories - rose to 114 in August from 109 in July, its highest since the third quarter of 2002. The index was compiled quarterly until the second quarter of 2008.
Separate central bank data released on Wednesday showed overseas credit purchases rose 16.6 percent in the second quarter from the previous quarter on revived confidence, reversing three quarters of declines. South Korean stocks rose 0.8 percent to their highest close in 13 months while the won reversed an early modest decline to end higher.
The central bank has called in all of its emergency foreign-currency loans to domestic banks and issued warnings on house price growth, while the finance ministry plans to raise the minimum income tax on large companies from next year.
Money market rates are crawling up. The 91-day certificate of deposit (CD) rate rose 4 basis points to 2.56 percent on Wednesday, the highest close since mid-February. The CD rate, the most influential money-market rate for South Korean banks when they set lending interest rates, has gained 15 basis points over the past three weeks.
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