The South Korean finance ministry's research arm called for a gradual unwinding of emergency economic policies, adding to building market expectations that the Bank of Korea could raise interest rates as early as in November. The remarks from the Korea Development Institute (KDI) underline the view that some Asian countries will be the first to start removing some of the extraordinary stimulus put in place to counter the global financial crisis.
The Bank of Korea meets on Thursday and although it is widely expected to leave its policy rate unchanged at a record low of 2.0 percent, analysts surveyed by Reuters this week priced in higher chances than before for a rate rise this year. "In line with the recovering economy, it is desirable for the authorities to gradually normalise the macroeconomic policy stance, which has so far been structured with the aim of crisis management," the KDI said in a statement.
"Regarding the monetary and financial policy, efforts are needed to prevent the economic recovery from lifting inflation and the rising short-term liquidity from leaving counter effects such as sharp rises in asset prices," it said. The Ministry of Strategy and Finance, however, reaffirmed it would maintain expansionary fiscal policy for now. South Korea's official inflation rate has stayed low despite a pick up in August.
Analysts, however, said the brewing housing boom fuelled by rising mortgage lending was likely to trigger a policy shift eventually, noting the Bank of Korea's interest rate policy had often tracked economic growth and asset price trends more closely than official inflation. Kong Dong-rak, a fixed-income analyst at Taurus Investment & Securities, said it would be difficult for the central bank board members to ignore the ministry's stance, though five out of 12 analysts polled this week thought it did not preclude a cautious rate increase before the year-end.