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Korea to strengthen the won and hold rates: Nomura

22 Aug 2011

Worries in the US and Europe could hamper the country’s ability to grow this year and cause currency appreciation instead of rate hikes, strategists at the Japanese bank believe.

The risk of global debt-related risks hurting South Korea’s 5% GDP growth target for 2012 is likely to lead the country’s central bank to hold off on raising interest rates this year, which in turn could cause the country’s currency to strengthen, say analysts at Nomura.

The Japanese bank notes that not raising the country’s benchmark 3.25% interest rate over the coming months would invite imported inflationary pressure, and in turn may cause the Bank of Korea (BoK) to let the Korean won appreciate, despite the risks associated with its exporters.

“Inflation is still likely to be the authorities' policy priority, with it probably remaining uncomfortably high over the next six months—close to the top end of the BoK's 2%-4% target range—but headline inflation is projected by the BoK to slow notably in Q4,” Nomura said in a report published on Monday (22 August).

The bank adds that, after a series of meetings held with policy makers, that consensus for allowing the won to strengthen is broad based but the decline in global risk sentiment will be a defining factor.

“We believe that any stabilisation of global risk could see the won outperform because of strong exports, capital inflows, favourable won valuations, low corporate breakevens on US$/KRW, few exporter concerns over won strength, and international political pressures,” Nomura said.

22 Aug 2011