Seoul: The Australian central bank's decision on Tuesday to raise interest rates eased pressure on the Bank of Korea from holding back on raising its own rates - a factor immediately recognised by financial markets.
Within seconds of the decision by the Reserve Bank of Australia to become the first central bank in the G20 to raise interest rates following the financial crisis of the past year, Korean December bond futures tumbled.
The RBA decision, analysts say, takes pressure off the Bank of Korea, which has been threatening to raise interest rates from a record low of 2 per cent if needed to prevent a property price bubble from forming.
The Bank of Korea reviews policy on Friday.
The Bank of Korea will now feel less burden in shifting away from a loose monetary policy, increasing the chances of an earlier rate rise. The central bank slashed rates to a record low during the crisis to support the economy.
South Korea's media has hailed the success of the economy in recovering from the global financial crisis faster than many other economies.
But Bank of Korea officials had informally expressed concern that they would face criticism if the central bank was to raise interest rates ahead of other countries.
Now they will be able to point in the direction of the RBA to deflect any domestic political criticism of a decision to raise rates.
Before the RBA decision, all 15 analysts in a Reuters poll had forecast the central bank would leave rates on hold this Friday. But 7 of 15 had forecast a rise in rates in November and all had said rates would rise by the first quarter of 2010.
Policy makers had also been concerned that a rate rise in South Korea could be seen as breaking ranks with the G20, which has pledged to keep stimulus measures in place to try to secure a recovery in the global economy.
Again, they can point to fellow G20 member Australia to deflect such criticism. South Korea is sensitive to its role within the G20 because it will host a summit of the G20 next year.
In addition, the country's finance minister has said on several occasions that any shift away from stimulus policies would be done in coordination with other countries.
The possible additional boost from higher interest rates to the already bullish won is not likely to be a serious concern for the Bank of Korea because the won has been driven more by the local stock markets and corporate earnings than interest rates.
The won is also below levels seen before the collapse of Lehman Brothers in September last year and its recent rise comes in step with other emerging-market currencies, suggesting any impact on South Korean exports would be limited.
The Bank of Korea believes most South Koreans understand the serious counter-effects from a boom in property prices and mortgage borrowing.
Property prices in South Korea are rising rapidly. Apartment prices in Seoul have defied the global financial crisis to rise 20 per cent since the start of the year.
The economy is also more vulnerable to a property boom than many other economies.
South Koreans put nearly 80 per cent of their assets into real estate, compared with barely half in advanced economies where more investment goes into areas like pensions. Mortgage loans, for instance, have risen for eight consecutive quarters despite the economy's slide during the global financial crisis.
South Korea already has one of the highest consumer debt burden compared to the size of its economy or pace of disposable income growth and the central bank fears borrowing could become unsustainable soon.
