Economists Don’t Expect a Third Rate Cut in Korea This Year

(Bloomberg) -- After two interest-rate cuts this year, the Bank of Korea is likely to stand pat when it meets Friday, with investors focusing on the bank’s economic forecasts and any dissenting votes for clues on where policy heads next.

That’s the view of economists surveyed by Bloomberg this month as the BOK prepares for this year’s last rate decision amid a global trade slump that’s put South Korea on course for its slowest growth in a decade. Having cut its key rate to match a record low in October, the bank is likely to stay on hold to monitor the effectiveness of its stimulus and look for any signs of side effects such as overheating in the property market.

All 26 analysts surveyed by Bloomberg expect the BOK to hold its rate at 1.25%. If the BOK stands pat, dissenting votes could give hints on next year’s policy steps. The bank has a history of moving towards its dissenters after decisions that aren’t unanimous.

“Keep an eye on who votes against the consensus,” said Moon Hong-cheol, a strategist at DB Financial Investment. “We may see a signal for at least one cut in the first half given caution against optimism about U.S.-China trade talks. For now, the BOK will want to see how the two previous rate cuts feed through.”

In the BOK’s July forecast, the central bank said the economy would expand 2.2% this year and 2.5% the next. Governor Lee Ju-yeol has since indicated that the estimate may have been too optimistic. If the bank significantly lowers its official estimate for next year, that could be a signal that at least one more rate cut is coming. Economists surveyed by Bloomberg project 1.9% and 2.2% expansion for this year and next, respectively.

“The outlook is crucial here,” said Chang Min, a researcher at the Korea Institute of Finance and a former head of research at the BOK. “The bank is going to consider cutting rates next year if it sees actual growth headed below its forecast.”

An exports slump has been at the heart of South Korea’s growth concern, with shipments headed for a 12th monthly contraction in November. The central bank’s judgment on how the U.S.-China trade war will play out, as well as the timing of a tech industry rebound, will be key factors in its 2020 growth outlook.

Rate Projections

Consumer prices have either fallen or barely moved in the past few months, bolstering the case for additional easing. The Korea Development Institute, a state-run think tank, said in its 2020 outlook this month that monetary policy needs to be more accommodative to deal with low inflation and economic risks.

At the post-decision press conference, look for any remarks from Lee that suggest the bank is placing emphasis on maintaining financial stability over supporting inflation, both of which are objectives of BOK policy. Any shift toward financial stability would indicate a policy hold for some time, even though headline inflation was running at 0% in October, far below the bank’s 2% target.

Heading into 2020, a majority of economists surveyed by Bloomberg on longer-term rate projections see no change at 1.25%, or one cut to 1%. A few see two reductions or even a hike.

The BOK is expected to announce its decision around 10 a.m. in Seoul on Friday, followed by an assessment of the economy and inflation. Lee usually holds a press conference at around 11:20 a.m. where the updated quarterly economic outlook is also announced. A detailed outlook report is released later in the day.

The Bank of Korea, which cut its policy rate by 50 bps this year, has kept the door open for future easing. Despite the step up in stimulus, policy makers will need to remain on the defensive given the heightened risks.

-Justin Jimenez, economist

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To contact the reporter on this story: Sam Kim in Seoul at skim609@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Jiyeun Lee, Jason Clenfield

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