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

(Bloomberg) -- South Korea’s central bank is expected to leave its key interest rate unchanged on Thursday, with investor focus turning to its outlook for economic growth and inflation.

All but one of 22 economists surveyed by Bloomberg forecast that Governor Lee Ju-yeol and his policy board will hold the seven-day repurchase rate at 1.75 percent. One economist expects the rate to be cut to 1.5 percent as weak exports depress growth and price gains.

While Lee has said that risks to Asia’s fourth-largest economy have risen and the recovery in the semiconductor industry may be slower than hoped, he’s held to the view it isn’t time to lower borrowing costs. Most economists see no change in the benchmark all year, although the bond market has flirted with the possibility of an adjustment.

Yields of South Korea’s three-year government bonds dropped under the central bank’s key rate to a 21-month low late last month. Yet as the policy meeting approached they’ve been selling the nation’s debt, pushing yields back up a little.

"I saw it as a temporary event reflecting increased market hopes for a rate cut," said Lee Young-hwa, an economist at Kyobo Securities in Seoul. "But I don’t think the BOK could cut or hike rates at this stage, with household debt remaining high. And the economy doesn’t seem to be as ugly as the market feared."

Governor Lee lowered the BOK’s 2019 growth and inflation projections at January’s meeting to 2.6 percent and 1.4 percent, respectively. There is some chance they could be trimmed again after he recently said the growth trend has moderated somewhat while downside risks have risen.

Some help is on the way, with the government planning an extra budget for this year of up to 7 trillion won ($6.1 billion). While that’s not as much as many economists called for, Kyobo’s Lee said it may be enough to keep the BOK’s growth estimate intact. She expects the inflation projection to be lowered, possibly to 1.2 percent following the extension of fuel-tax cuts.

What Bloomberg’s Economists Say

"Policy makers have repeatedly emphasized that it is not the time to consider a rate cut. Barring a severe downturn, we think they will stick to that line and keep the policy rate steady through at least year-end."
--From the Asia Economist Team
Click here to view their weekahead report

The central bank typically announces its interest-rate decision at about 10 a.m. in Seoul, followed soon after by statements on policy and the economy. Governor Lee’s 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, Paul Jackson

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