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Bank of Korea Decision Guide: Watch for Cuts to Outlooks

Bank of Korea Decision Guide: Watch for Cuts to Outlooks

(Bloomberg) -- With the Bank of Korea expected to keep its benchmark interest rate unchanged on Thursday, focus turns to any revision to its economic growth and inflation estimates and clues to when the next move in borrowing costs may come.

All but one of 25 economists surveyed by Bloomberg forecast no change to the seven-day repurchase rate, which was raised for the first time in a year at the last policy meeting in November. One economist predicts a 25-basis-point cut.

Governor Lee Ju-yeol has said monetary policy should remain accommodative and that the economy’s potential growth is weakening due to slowing investment by companies. He’s also warned that inflation for this year may come in slightly lower than the central bank’s current projection of 1.7 percent because of a sharp drop in oil prices.

Bank of Korea Decision Guide: Watch for Cuts to Outlooks

Most economists also expect the BOK to cut its projection for gross domestic product to expand 2.7 percent for this year, largely due to weakening exports.

While most central bank watchers think Korean borrowing costs will remain unchanged this year, very large cuts to GDP and inflation forecasts would bolster the case for lowering the benchmark rate.

On the flip-side, Lee has also indicated that a somewhat less-hawkish outlook for monetary policy in the U.S. could become a bigger swing factor for him and his board. Rates in the U.S. that are significantly higher than those in Korea tend to encourage capital outflows from the Asian economy, putting pressure on the BOK to raise its benchmark.

Chairman Jerome Powell said earlier this month that Federal Reserve policy makers would be patient and flexible about pushing ahead with interest-rate increases. The Fed meets next week, hot on the heels of the European Central Bank, which gathers to consider policy later Thursday, and the Bank of Japan, which kept stimulus unchanged on Wednesday.

Bank of Korea Decision Guide: Watch for Cuts to Outlooks

Lee’s comments on trade will also be scrutinized for hints about downside risks to Korean growth. Early trade data for January added to the gloomy outlook for the export-dependent economy. Overseas shipments fell by the most in more than two years while exports to China slumped and sales of semiconductors -- a key driver of growth in recent years -- tumbled.

What our economists say ...

"Our view is that risks to growth and muted inflation mean the central bank is now set for a long pause," Bloomberg Economics said in its week-ahead preview before Thursday’s decision. "A slower pace of tightening by the Federal Reserve would also add to the case for the BOK to stay on hold. We expect the BOK to keep its key rate at 1.75 percent through 2019."

Nomura International said in a recent note that the BOK could bring forward the timing of easing to as early as this year if the U.S. stops hiking rates earlier than September and Korea’s household debt growth slows faster than expected.

The central bank’s policy announcement typically comes around 10 a.m. in Seoul, followed by a statement that includes brief assessments of the economy and inflation. Governor Lee gives additional details at a news conference starting around 11:20 a.m.

To contact the reporter on this story: Jungah Lee in Seoul at jlee1361@bloomberg.net

To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Henry Hoenig

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