South Korea, New Zealand Raise Rates;Japan May Switch Policy

[HenryTo]

South Korea unexpectedly raise rates, while New Zealand - at 7.25% - has the highest official "cash rate" out of all the developed countries in the world. The fact that monetary base in Japanese has been growing at a dismal pace suggests that the BOJ has already been cutting down on liquidity growth for sometime now:
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South Korea, New Zealand Raise Rates; Japan May Switch Policy
Dec. 8 (Bloomberg) -- Central banks in South Korea and New Zealand raised interest rates to curb inflation and the Bank of Japan said it is close to ending its deflation-fighting policy.

The Bank of Korea unexpectedly raised the overnight call rate a quarter percentage point to 3.75 percent in Seoul today. The Reserve Bank of New Zealand raised its cash rate by the same amount to a record 7.25 percent. Bank of Japan Governor Toshihiko Fukui said in a speech ``an end is close'' to his policy of flooding commercial banks with cash.

The focus of Asian central banks on stemming inflation follows a five-day jump in oil prices and reports on U.S. economic growth that reinforced expectations the Federal Reserve will keep raising rates. The European Central Bank and Bank Indonesia also increased borrowing costs this month.

``Monetary policy in several Asian countries needs to be tightened,'' said Dilip Parameswaran, head of Asian credit research at Calyon, the securities arm of Credit Agricole SA. ``Inflation needs to be contained otherwise it becomes a longer- lasting disease. I think central banks in Asia will act.''

Asian stocks fell, with the Morgan Stanley Capital International Asia Pacific Index dropping 1.5 percent to 115.83 at 2:47 p.m. in Tokyo as stocks in South Korea, Japan and New Zealand fell. The yen strengthened to 120.67 against the dollar in Tokyo, from 121.03 late yesterday in New York.

Bank of Japan

The yen has dropped 15 percent this year against the dollar as the U.S. Federal Reserve raised interest rates seven times this year while the Bank of Japan left its rates near zero. The European Central Bank raised its benchmark interest rate to 2.25 percent Dec. 1, its first increase in five years.

``Economies around the world are recovering and in many places the interest rates have rather been historically low and ultra accommodative,'' said Dave Cohen, director of Asian economic forecasting at Action Economics in Singapore. ``That's why it's not very painful yet to raise interest rates.''

Bank of Japan Governor Toshihiko Fukui today said his board may switch policy because consumer prices will gain in the first three months of 2006.

``It is clear to everyone that the end is close,'' Fukui said in a speech in Nagoya City, referring to the ``quantitative easing'' policy of flooding banks with cash. He later said he didn't mean policy will change in the first quarter.

The Bank of Japan, which cut overnight lending rates to zero 4 1/2 years ago, has focused on providing lenders with plentiful reserves to encourage lending. Fukui yesterday met with Prime Minister Junichiro Koizumi, after months of tension over the timing of a policy change.

Agreement Reached?

``Fukui's comments following his meeting are leading investors to believe the bank has been authorized to end quantitative easing,'' said Koji Shimamoto, chief strategist in Tokyo at BNP Paribas Securities Japan Ltd., the second-highest ranked Japan bond analyst by Nikkei Bonds and Financial Weekly.

Cutting the reserves provided to banks is a precursor to a rate increase in Japan, which would mean borrowing costs are rising in all three of the world's global economies for the first time since 2000. Bank of Japan Deputy Governor Toshiro Muto said on Dec. 2 that the bank will probably keep interest- rates ``at almost zero'' even after a policy shift.

Koizumi's government has been concerned a change in central bank policy would prompt investors to dump bonds, raising yields on the nation's debt, which is projected to reach 151 percent of gross domestic product by March.

The Japanese economy will achieve a lasting expansion and probably grow at about a 2 percent annualized pace this and next fiscal year, Fukui said. Japanese people are starting to expect prices to rise, rather than to decline, he said.

``It is highly likely that consumer prices will become positive as a trend,'' Fukui said. ``Core consumer prices will show solid gains in the January-to-March period.''

Bank of Korea

South Korea's central bank unexpectedly raised rates for the second time in three months, as an accelerating economy threatens to spur inflation. All nine economists polled by Bloomberg expected the bank to leave the rate unchanged.

``The central bank is taking a preemptive action,'' said Im No Jung, an economist at Hanwha Securities Co. in Seoul. ``Confidence is rising, sales are picking up and the central bank is looking at higher growth next year.''

Inflation will accelerate to 3 percent next year from 2.7 percent this year, the central bank said Dec. 6. Core inflation, which excludes food and energy, will probably accelerate to 3.3 percent in the second half of 2006 from 2.1 percent in the first half, the central bank said at the time. Core inflation has lagged the bank's 2.5 percent to 3 percent target for six months.

The central bank on Dec. 6 predicted South Korea's economic growth will accelerate to 5 percent in 2006, which would be the fastest pace in four years.

New Zealand

New Zealand's central bank raised its benchmark rate, saying the ninth increase since January 2004 is needed to curb household spending and inflation.

``We remain concerned about the tightness of resources and the persistence of inflation pressures,'' Reserve Bank Governor Alan Bollard said in Wellington today. ``The main driver of the strong demand is household spending, linked to a buoyant housing market.''

Bollard, who is tasked by the government with keeping inflation between 1 percent and 3 percent, said he doesn't see any prospect of cutting the official cash rate, which is the highest of any nation with the top credit rating at Moody's Investors Service. Inflation will stay near 3 percent for the next two years, he said.

`Too Optimistic'

Spending in New Zealand's $97 billion economy has been buoyed by a record low jobless rate and a 15 percent jump in house prices the past year. Bollard, whose policies have been criticized by business leaders, said there's a risk that the longest run of rate increases in the Reserve Bank's history may stall the economy.

``The Reserve Bank is being too optimistic about how resilient the economy will be,'' said Nick Tuffley, senior economist at Westpac Banking Corp. ``They could get a rude surprise.''

Westpac expects the economy will expand just 1.9 percent next year. Bollard today forecast 2.4 percent growth in 2006.

To contact the reporter on this story:
Mayumi Otsuma in Tokyo at motsuma@bloomberg.net