SCENARIOS-Bank of Korea to assure steady rates for now

By Seo Eun-kyung SEOUL, Nov 10 (Reuters) - South Korea's central bank looks certain to keep interest rates at a record low this week and is expected to hint they will stay there until the end of this year amid an uncertain global economy and benign inflation. Investors have scaled back their bets on a rate rise this year after the central bank chief recently toned down concerns about surging property prices and as top government officials opposed an early tightening despite upbeat economic data. Here are some possible outcomes of the Bank of Korea's monetary policy committee meeting and the subsequent news conference by its governor, due on Thursday, as well as the expected market reaction: LOOSE POLICY TO STAY "FOR TIME BEING" The Bank of Korea will likely hold the 7-day repurchase agreement rate steady at 2.0 percent for a ninth consecutive month and repeat its pledge to keep the monetary easing policy "for the time being". The central bank will maintain its cautious view on the global economy, but will try to open the door for an interest rate increase over the coming few months by saying Asia's fourth-largest economy remains on a solid recovery track. It will also say it needs more time to assess the effect of recent government lending controls on the housing market, suggesting that a revival of the property boom could still influence future policy. Growth in mortgage lending slowed in October for a third straight month, though apartment prices across the country continued to creep higher. * Probability: high * Market reaction: Bond and stock prices will rise if the cental bank's comments reinforce investors' expectations that rates will be held steady for several more months. But there will likely be little reaction in the won because the currency has been rallying already on increased appetite for riskier assets among global traders. FLAGS IMMINENT HIKE ON STRONG RECOVERY The Bank of Korea may say it is not desirable for interest rates to be kept at an extremely low level for a long time because the broadening recovery in the domestic economy will eventually fuel inflation expectations. It may drop its months-long assurance that it would keep an easy policy stance for the time being, and instead say its policy would depend on economic and financial conditions and that the government's opinion will not decide central bank policy. It may also revive concerns over the property market and say the effect of government lending controls are not sufficient to prick an asset bubble as long as the borrowing costs stay low. * Probability: medium. * Market reaction: Bond and stock prices will fall sharply and the won will rise as unexpectedly hawkish comments would prompt investors to increase bets on a rate rise this year or in January. RATES RAISED, MORE TO COME The Bank of Korea may raise the benchmark rate by 25 basis points for the first time since August last year and after six consecutive cuts, citing a faster-than-expected economic recovery and the subsequent boost to inflation expectations. It may open the door for additional tightening by saying its monetary policy will continue to be accommodative even after several increases in the benchmark rate. The central bank may warn that it was not time to be complacent despite low inflation because a fast economic recovery and abundant liquidity will eventually lead to higher inflation expectations. * Possibility: low. Only one of 14 analysts surveyed by Reuters predicted a rate increase on Thursday. Most do not expect a rise until the first quarter. * Market reaction: Bond and stock prices will plunge and the won will jump as investors rush to price in a faster-than-expected rate tightening campaign. (Editing by Yoo Choonsik & Kim Coghill) (([e-mail];[phone]; Reuters Messaging:[e-mail])) Keywords: KOREA ECONOMY/RATES (If you have a query or comment on this story, send an email to [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

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