South Korean consumer confidence hit a 7-1/2-year high in October, keeping the Bank of Korea on course to raise interest rates early next year as the government repeated its warning against any hasty action. The Bank of Korea consumer sentiment index, compiled from a survey of consumers covering several categories such as the economy, living standards and spending plans, rose to 117 in October from 114 in September.
Expectations for property price growth eased, which may help ease some concerns of the central bank after it had threatened in August and September to raise interest rates to deal with the surging market. The property expectations provided fuel for bargain hunters in the bond market, which had fallen ahead of data on Monday that showed the economy grew in the third quarter at its fastest pace in more than seven years.
"The recent market reaction to the GDP data seems overdone, with (bond) market rates already reflecting a percentage point rate hike," said Jung Sung-min, a fixed-income analyst at Eugene Futures, referring to recent sharp rises in bond yields. The five-year treasury bond yield shed 9 basis points, giving up some of the 13 basis-point rise over three sessions. December treasury bond futures rose 32 ticks after falling 42 ticks over the previous three sessions.
The consumer sentiment index in October matched a level last seen in the first quarter of 2002. An index measuring consumer expectations for future prices of residential and commercial buildings dipped to 110 from 112 in September, which had been a more than 1-year high.
H1N1 FLU SCARES: The strong GDP figures reinforced expectations that the central bank would have to raise interest rates early in 2010 following big cuts during the global downturn. The sentiment data did not change that view, analysts said.
Expectations for an earlier rate rise shot up in August and September when the central bank governor suggested he would have to tighten policy if a rise in property prices didn't calm. He softened his stance this month. Vice Finance Minister Hur Kyung-wook maintained pressure on the central bank to leave policy unchanged. He said economic prospects were too uncertain to raise interest rates yet.
"Both (raising interest rates) too early and too late carry risks for the economy. But in general, doing it too early would create bigger problems than doing it too late," he told the YTN cable news channel. Central bank minutes also showed that the spread of the H1N1 flu virus was playing on the minds of policy makers. The minutes of the central bank's September 10 meeting quoted two unidentified board members expressing concern about the economic impact from the virus.
"It is significant that they mentioned risks from the H1N1 because the comment could further reduce expectations of a rate hike within this year," said Kong Dong-rak, a fixed-income analyst at Taurus Investment & Securities. In August, Korean health authorities reported the country's first fatality from the flu. The central bank has held its 7-day repurchase agreement rate steady at a record low of 2.0 percent since February. It next reviews the rate on November 12.