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S.Korea PPI data lifts rate cut hopes;won drags

Reuters - Wednesday, October 8

SEOUL, Oct 8 - South Korean producer inflation slowed to a 3-month low in September, reflecting easing consumer inflation pressures in the pipeline and adding to speculation the Bank of Korea would soon cut interest rates.

Still, it remains difficult for the central bank to slash interest rates as the won currency <KRW=> earlier hit its weakest since October 1998, when the country was grappling with the Asian financial crisis, economists said.

A weaker won usually bolsters import prices, which results in higher consumer prices.

"The data gave policymakers more room to cut rates as it lowered inflation expectations. But the Bank of Korea will have to consider a weaker won and its impact on inflation," said Ryu Seung-sun, an economist at HMC Investment Securities.

Bahk Byong-won, a senior secretary to the president on economic issues, said the future trend of consumer inflation would be determined more by the value of the won than oil prices. [ID:nSEO75478]

Reflecting the expectations, December treasury bond futures <KTBc1> fell 1 tick to 106.36 as of 0432 GMT, erasing early gains of as much as 48 ticks.

The producer price index in September rose 11.3 percent from a year earlier, the Bank of Korea said in a statement, the slowest since 10.5 percent in June, although it stayed in the double digits for the fourth month in a row.

The data came a day before the central bank's monthly monetary policy meeting on Thursday.

The Bank of Korea is expected to hold rates this week before starting trim them in coming months to stave off a sharp economic slowdown amid a global credit crunch, a Reuters poll showed.

Other data, especially money supply growth figures, may also force the Bank of Korea to hold off on an imminent rate cut, they added.

The L money supply, South Korea's broadest measure of money supply, rose a provisional 13.3 percent in August from a year earlier, slightly faster than a 13.2 percent annual gain in July, according to the central bank.

Separate data showed monthly growth in South Korean bank lending to small and medium size enterprises and households both remained steady in September.

"If we consider only the data, the Bank of Korea does not need a rate cut, but it still needs to lower rates given the recent global credit crunch and an economic slowdown," said Park Sang-hyun, the chief economist at HI Investment & Securities.

Meanwhile, a senior official at the Bank of Korea on Tuesday denied local newspaper reports that it was considering lowering the cash reserve requirements at commercial banks, a move which would allow banks to lend more of their deposit money.

Any change in the reserve requirement ratios -- the percentages of money received from depositors that each bank has to put aside -- has to be decided by the Bank of Korea's monetary policy committee, which holds a monthly meeting on Thursday. (Reporting by Cheon Jong-woo and Seo Eun-kyung; Editing by Jonathan Hopfner)

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