Korea Decision-Day Guide: Focus on BOK's Latest Views on Economy

(Bloomberg) -- The Bank of Korea is widely expected to keep its benchmark interest rate unchanged on Thursday, with investors’ focus quickly turning to Governor Lee Ju-yeol’s views of the economy and rising trade tensions.

The policy meeting will be Lee’s first since being reappointed last month. All 16 economists surveyed by Bloomberg expect no change to the key rate, now at 1.5 percent. Most analysts see a rate increase coming in the second half of the year.

Analysts cite inflation that remains far below the central bank’s 2 percent target as well as uncertainties posed by U.S.-China trade tensions as among reasons for the BOK to hold.

While noting that the direction for rates is higher, Lee has said repeatedly that monetary policy will remain accommodative and that financial conditions wouldn’t be tight even after one or two rate increases.

The central bank typically announces its rate decision at about 10 a.m. in Seoul, and shortly after releases a policy statement that includes brief assessments of the economy and inflation. Lee will offer additional details at a press briefing scheduled for 11:20 a.m.

Here are key points to watch:

Growth, Inflation

In its January forecast, the BOK said it expected the economy to grow 3 percent this year and inflation to register 1.7 percent. With the latest inflation reading at only 1.3 percent, and a stronger won curbing import-price gains, the central bank might lower its inflation forecast, according to NH Investment & Securities Co.

NH Investment and Nomura International Ltd. were among those predicting no change to the forecast for gross domestic product, reasoning that any fallout from China-U.S. trade tensions could be offset by the government’s planned extra budget.

Investors will also be looking for Lee’s assessment of geopolitical tensions and the Federal Reserve’s latest rate increase, which pushed U.S. borrowing costs above Korea’s.

Exchange Rate

Lee may also offer updates on the status of discussions about releasing data on foreign-exchange intervention, and his views on the result of the U.S. Treasury’s semi-annual currency report. South Korean officials have said they are discussing measures to enhance market transparency with the Treasury and International Monetary Fund, but haven’t offered details of how they might do so.

Dissenting Vote

Lee usually reveals the names of any policy dissenters during his news conference. A dissenting vote is often a precursor of policy changes within the next few months.

Whether there is a dissenting vote on Thursday would play a key role in shaping investors’ expectations, according to Hana Financial Investment.

“If the decision is a unanimous hold, the possibility of a raise in May would disappear and most investors would expect only one hike for this year,” Lee Mi-seon, a fixed-income analyst at Hana Financial, wrote in a note. “If there is a dissenter, calls for a May hike will gain support and expectations for another hike in the second half may also rise.”

The won has largely been range-bound in recent months, but last week touched the strongest level in more than three years. It has appreciated more than 6 percent in the past six months. It closed at 1,066.40 per dollar on Wednesday, and the yield on three-year government bonds was 2.17 percent.

©2018 Bloomberg L.P.