navSEO

A majority of the Bank of Koreas
board voted to leave the nations benchmark interest rate
unchanged in October before the monetary authority raised
borrowing costs this month for the second time in 2010.

Five of six board members opted to keep the rate at 2.25
percent, citing concern that currency volatility had clouded the
export outlook, according to the minutes of the Oct. 14 policy
meeting released by the central bank today. One called for a
0.25 percentage-point increase to damp price pressures.

A cautious approach is needed, given our reliance on
exports for growth, when major countries compete to undervalue
their currencies, one unidentified member said. But we need
to send a signal that we will continue to normalize interest
rates.

South Korea is striving to contain price pressures while at
the same time avoid exchange-rate gains. Governor Kim Choong Soo
and the policy board raised borrowing costs by a quarter
percentage point to 2.5 percent in November after inflation
breached the central banks 4 percent ceiling.

The won has risen by 2.8 percent against the dollar in the
past three months, the third-biggest gainer in Asia. The
currency fell 0.6 percent to 1,159.25 at the 3 p.m. close in
Seoul. The benchmark Kospi stock index climbed 0.5 percent.

Inflation Outlook

Consumer price growth may have eased to 3.7 percent this
month from a 20-month high of 4.1 percent in October, according
to the median estimate of 10 economists surveyed by Bloomberg
News. The central bank is targeting inflation of 2 percent to 4
percent on average through 2012.

The bank dropped its pledge to keep monetary policy
accommodative after the rate increase on Nov. 16. While the
benchmark isnt currently at a neutral level, the economy isnt
ready for normal rates yet, Kim said at the time.

Reports today showed industrial output rose 13.5 percent in
October from a year earlier, less than the median forecast of
15.1 percent in a Bloomberg News survey of nine economists,
while manufacturers confidence declined to an 11-month low for
December.

Quarterly growth in Asias fourth-largest economy halved to
0.7 percent over the three months through September as the won
rose the most in Asia and goods shipments cooled over the period.

The policy board meets on Dec. 9 to set borrowing costs.

To contact the reporter on this story:
Eunkyung Seo in Seoul at
eseo3@bloomberg.net

To contact the editor responsible for this story:
Chris Anstey in Tokyo at
canstey@bloomberg.net

SEO central bank, Governor Kim Choong, percent ceiling, price pressures

South Korea began a 24-hour market
watch as officials prepared measures to address any financial
turmoil in the aftermath of what the government said was North
Korean shelling of a border island.

The Bank of Korea held an unscheduled meeting late today in
Seoul, and deputies from the BOK and government agencies gather
tomorrow at 7:30 a.m. to discuss the market impact and potential
countermeasures, the finance ministry said in a statement.
Regulators will take preemptive steps if needed, the Financial
Services Commission and Financial Supervisory Service said.

A record stockpile of $293.4 billion in foreign-exchange
reserves in October offers officials firepower to help stem any
selloff in the nations assets. Policy makers have in recent
weeks focused on stemming an influx of speculative capital into
Asias fourth-largest economy, and intervened in the currency
market this year as the won rose against the dollar.

In the past, theyve been active in both the currency and
fixed-income markets to provide support or smoothing operations
and its possible we could see that again if stress were to
intensify, said Tim Condon, head of Asian research at ING
Groep NV in Singapore. It will depend on North Korea –
whether this turns into more than a one-day event.

South Korea scrambled fighter jets and returned fire after
North Korea lobbed dozens of shells into its waters and an
island, injuring 14 soldiers, according to the government and
YTN reports. Television footage showed smoke billowing from
Yeonpyeong island off South Koreas northwest coast, where the
shelling set fire to houses, YTN said.

Won, Swaps

Won forwards dropped the most in more than two years and
bond futures fell. The cost of credit-default swaps insuring
South Korean government debt from default jumped 17 basis points
to 101 basis points as of 6:40 p.m. in Seoul, according to Royal
Bank of Scotland Group Plc prices.

We will decide what to do after watching developments,
Yoon Jong Won, director general at the finance ministry in
Seoul, said by telephone today. Were closely monitoring the
financial markets.

The ministry said in its statement that officials are
monitoring markets including credit-default swaps and
nondeliverable won forwards, and moves by credit rating agencies
and foreign investors. Finance Minister Yoon Jeung Hyun said the
shelling will have a limited impact on the economy, Yonhap news
agency reported.

Interest Rates

South Koreas currency had rallied the past two months as
escalating inflation pressures prompted bets the central bank
would raise interest rates further. The BOK last week boosted
its benchmark by a quarter point to 2.5 percent, and dropped a
pledge to keep borrowing costs accommodative.

Policy makers also this month took steps to curb foreign
inflows of capital blamed in part on monetary stimulus in
advanced nations. The government is backing legislation
reinstating a 14 percent tax on interest income from treasury
and central bank bonds and a 20 percent capital gains levy on
their sale.

The security incident will likely have no small impact on
stock, bond and currency markets tomorrow, BOK Deputy Governor
Lee Ju Yeol said at the start of this evenings emergency
session. We all should closely monitor the financial markets
with high alert and be fully prepared to take appropriate action
in cooperation with the government when necessary.

Earlier Incident

Earlier this year, the won recovered from a 10-month low
after tensions escalated over the March sinking of a South
Korean warship that the government said was caused by North
Korea. The nations economic rebound from the global recession
also continued, with gross domestic product expanding 7.2
percent in the second quarter from a year before.

Governor Kim Choong Soo raised the benchmark seven-day
repurchase rate by a quarter point from a record-low 2 percent
in July. The central bank will probably keep boosting the rate
to 3.75 percent by the third quarter of 2011, said Condon at
ING.

Intense political strains with the north would probably
mean some change to that forecast, Condon said. They might
even have to cut rates if things got dire enough, but Im
assuming things dont get that dire.

To contact the reporter on this story:
Eunkyung Seo in Seoul at
eseo3@bloomberg.net

To contact the editor responsible for this story:
Chris Anstey in Tokyo at
canstey@bloomberg.net

SEO central bank, markets, North Korea, South Korea

Bank of Korea officials will hold an
emergency meeting at 6 p.m. today in Seoul to discuss monetary
and financial market issues in the wake of North Koreas
shelling of a South Korean island, the central banks public
relations office said today.

Deputies from the central bank, finance ministry and other
economy and financial government agencies will also meet at 7:30
a.m. tomorrow to discuss the impact on the market and economy
and will consider countermeasures if necessary, the finance
ministry said in a statement.

We will decide what to do after watching the
developments, Yoon Jong Won, director general at the finance
ministry said by telephone today. Were closely monitoring the
financial markets.

Won forwards dropped the most in more than two years and
bond futures fell as South Korea scrambled fighter jets and
returned fire after its northern neighbor fired artillery shells
near the border. The cost of credit-default swaps insuring South
Korean government debt from default jumped 15 basis points to 99
basis points as of 4:38 p.m. in Seoul, according to Royal Bank
of Scotland Group Plc prices.

To contact the reporter on this story:
Eunkyung Seo in Seoul at
eseo3@bloomberg.net

To contact the editor responsible for this story:
Chris Anstey in Tokyo at
canstey@bloomberg.net

SEO central bank, finance ministry, financial markets, South Korean