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Tension grows over South Korea rate policy

SEOUL (Reuters) - South Korea’s government and the central bank engaged in a rare public spat on Thursday over when to raise interest rates, with the finance ministry saying the country’s recovery was too fragile to risk a tightening.

The central bank wants to push up rates that have sat for seven months at record lows, fearful easy money is triggering an asset bubble that could unhinge Asia’s fourth-biggest economy further down the road.

Any move by the South Korean central bank could make it the first among G20 countries to raise interest rates since the start of the global economic crisis a year ago.

“On interest rates, the government does not think it is time (to raise them),” Finance Minister Yoon Jeung-hyun told reporters in his clearest comments to date that he opposed suggestions by the central bank it was readying for an increase.

Many analysts expect a 25 basis point increase from the current 2.0 percent as early as November.

The obsessively pro-growth government of President Lee Myung-bak has repeatedly argued that to change tack now on measures to protect the economy from the global downturn makes no sense when so many dangers remain.

Adding to the government’s concerns, the won has been rallying to 11-month highs against the globally softening dollar, posing a threat to the still slow recovery in exports. Dealers said the authorities have been selling the won.

The government points out that investment and employment are far too weak for the government to start withdrawing the money it has been pumping into the economy to compensate for the private sector’s tightly shut purses.

“We need to stay the course and continue our supportive expansionary policies until we are sure of solid recovery and revival in the private sector,” Yoon said.

Late last week, central bank governor Lee Seong-tae -- who has the casting vote on any rate decision -- gave a broad hint that the benchmark interest rate would go up soon, saying a rise would not mean an end to easy monetary policy.

“I believe implementing an exit strategy alone and too early will weigh down the Korean economy,” Yoon added.


The Bank of Korea, however, offered a slightly more upbeat tone on the economy and said regulatory measures alone may not succeed in calming an emerging property boom.

“Rising mortgage loans are one of the concerns. We believe that we should seek both macro- and micro-economic policy measures to cope with them,” a senior Bank of Korea official said.

Central bank officials admit that a three-year campaign, which ended last August, to raise rates largely failed to calm a property price boom at that time.

It has since cut the benchmark 7-day repurchase agreement rate by 3.25 percentage points between last October and February. It next reviews the rate on October 9.

Adding to the battle over rate policy, an influential government think-tank called on monetary authorities to consider taking steps to mop up excess short-term funds.

December treasury bond futures erased early losses as investors welcomed the ministry’s reaffirmation of its opposition to exiting soon from emergency measures put in place late last year.

“The finance minister’s comments gave some relief to debt investors while the waning strength in the stock markets also helped,” said Kim Dong-whan at HI Investment & Securities.

Fresh government data released on Thursday showed top department stores enjoyed the strongest annual sales growth in seven months in August, reinforcing optimism about the country’s economy.

Additional reporting by Jonathan Thatcher and Seo Eun-kyung; Editing by Jonathan Thatcher and Dean Yates