Bank of Korea Decision Guide: Rates on Hold, Focus on Dissenters

(Bloomberg) -- With the Bank of Korea expected to leave its key interest rate unchanged Friday, the focus will be on Governor Lee Ju-yeol’s outlook and whether he faces dissenting calls for a rate cut.

All but one of 24 economists surveyed by Bloomberg forecast the BOK will hold the seven-day repurchase rate at 1.75%. One predicted a cut to 1.5%.

Lee and his fellow board members face competing pressures. The trade-dependent economy is slumping as exports decline. Yet record household debt and capital outflows are also concerns, with the won ranking as the worst-performing currency in Asia this year.

Despite trimming the BOK’s 2019 growth and inflation forecasts at April’s policy meeting, Lee again stated that it wasn’t time to cut the benchmark rate, which was raised in November for the first time in a year. Inflation was 0.6% in April, and is forecast at 1.1% this year.

Dissenting Views

Since the April meeting, data has shown the economy contracted in the first quarter by the most in a decade, and both the Organisation for Economic Cooperation and Development and the state-run think tank Korea Development Institute cut their growth forecasts for the year to 2.4%.

The biggest development, though, is perhaps the ratcheting up of the trade war between the U.S. and China.

Along with recent comments from a BOK board member on inflation being "excessively low," it all adds up to rising expectations for a rate cut eventually, said Kim Sang-hun, a fixed-income analyst at HI Investment & Securities in Seoul.

"Any dissenting calls will surely bolster expectations for a rate cut before the year ends,” Kim said.

Falling Won

A sharp decline in the Korean won against the U.S. dollar in recent weeks has given policy makers something else to think about. A rate cut could propel overseas investors’ sales of local assets, weighing further on the currency, which has tumbled more than 5% in the past three months as of Thursday.

What Bloomberg’s Economists Say

"A ‘patient’ stance by the Federal Reserve gives the BOK room to stay on hold. Recent downward pressure on the South Korean won also cautions against a reduction in the policy rate."
--the Asia Economist Team
Click here to view the report.

The central bank typically announces its decision at about 10 a.m. local time, followed shortly by statements on policy and the economy. Governor Lee’s news briefing starts 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, Paul Jackson

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