International | Sep 20 2006
By Chris Shaw
A report by the Samsung Economic Research Institute paints a picture of increased stability in the outlook for the Korean economy, with both interest rates and growth likely to be less volatile in the coming year.
The institute notes in recent months the volatility in Korean interest rates has effectively halved from 0.2% to 0.1%, in part due to the impact of increases in the overnight call rate in the past year that have lifted this rate from 3.25% to 4.50%. These increases have flowed through to long-term rates, while also pushing up commercial bank rates for lending and borrowing.
The impact on the economy is not unexpected, the hikes in the overnight rate having led to a slowing in both consumption and industrial output, with the institute expecting a further slowing in coming months.
As this occurs it sees the potential for interest rates to come down slightly, or at least to move no higher over the course of this year. This is particularly so given the likelihood rate increases in the US have ended, meaning there is less pressure on the Koreans to lift rates to stop any outflow of capital chasing higher returns via a differential in interest rates.
The institute points out though policy makers in Korea face a similar problem to those in the US – the economy is showing signs of slowing but inflation remains a threat. This means further interest rate increases cannot be completely ruled out in the short-term, nor are any potential cuts to rates likely to be significant. As a result, it sees the economy struggling along, with growth likely to be relatively flat in coming months and into 2007.
