TILTED TOWARD RATE HIKE

Market watchers at home and abroad were tilted toward the BOK's rate hike in March after the latest economic data confirmed a robust growth and rising inflation along with comments of the finance ministry's senior official on demand-side inflation.

"The BOK needs to raise borrowing costs to contain inflation, and is expected to take actions in the March policy meeting," Yum Sang-hoon, a fixed-income analyst at SK Securities in Seoul, told Xinhua.

"The demand-pull inflation emerged distinctly as seen in the core inflation breaching 3 percent in February," Yum said, forecasting the nation's headline inflation for March would surge to 5.0 percent and core inflation to 3.9 percent respectively.

A Singapore-based DBS Group expected the country's headline inflation to stay above 4 percent until the fourth quarter this year, maintaining its outlook that the BOK will hike rates by 25 basis points to 3 percent next Thursday.

According to the report released by DBS on Thursday, the upswings in global food and oil prices in combination with the weakness in the South Korean won drove the country's food costs and transportation fees higher. It also pointed out that rising food and energy costs was transferred to price of eating-out and accommodation.

Right after the CPI announcement, Nomura Holdings revised up its CPI inflation forecasts for 2011 from 4.2 percent to 4.5 percent, keeping its call for a 25-basis-point rate hike at the rate-setting meeting slated for 10 March.

However, there remains a risk of holding rates due to lingering uncertainties over the Middle East and North Africa, Kwon young- sun, a Hong-Kong based economist at Nomura, said in a report.

The members of the BOK's board seem to have focused on short- term costs such as weaker economic growth, rather than long-term benefits, including stable consumer prices and financial stability, Kwon added.

CAUTION REMAINS

Both the February CPI reading and the January industrial production did not reflect the impact of the political turmoil in the Mideast countries on the South Korean economy, some market watchers here said.

According to the report released by Donyang Securities, the latest economic data have yet to reflect the political unrest in the Middle East, implying the BOK will likely more focus on external uncertainties with the decision to freeze its policy rate in the March monetary policy meeting.

Inflationary pressures in February resulted mainly from higher oil and food prices, but price rises in the restaurants & hotels sector imply that inflationary pressures spread to overall sectors, Lee Chul-hee, an economist at Dongyang Securities, said in a report.

However, the key reasons for consumer prices increases were external factors such as global oil and food prices along with the outbreak of foot-and-mouse diseases, so the BOK's rate hike has a limitation on curbing consumer inflation, he added.

The BOK's tight monetary policy will unlikely contain inflation expectations as the latest inflation arose from supply-side factors, not from liquidity expansion and stronger aggregate demand, Yoo Ik-sun, an economist at Woori Investment & Securities, said in a report.

The BOK's monetary tightening could weigh on local borrowers of mortgage loans, leading to weaker domestic demand, Yoo added.