Bank of Korea Rate-Hike Timing Clouded by Covid: Decision Guide

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The Bank of Korea is expected to provide further guidance on its plans to raise interest rates this year when the board meets Thursday, even as a renewed surge in coronavirus cases rules out an imminent tightening.

All 20 analysts surveyed by Bloomberg predict South Korea’s central bank will hold its key rate at a record-low 0.5% this week. That announcement would be overshadowed, though, if it transpires that there were dissenting votes calling for a hike at the meeting, an outcome that typically presages a policy move in subsequent months.

Governor Lee Ju-yeol has made clear that the board intends to start paring back emergency stimulus to rein in financial imbalances. With just four rate reviews remaining in 2021, including this week’s, investors want to know the timing for liftoff, and how the latest outbreak and associated restrictions will impact the decision.

Bank of Korea Rate-Hike Timing Clouded by Covid: Decision Guide

“The unexpected spike in Covid infections dents the likelihood of an earlier rate hike,” wrote Angela Hsieh, an economist with Barclays Bank Plc who expects a 25 basis-point increase in November. “The market will look for any dissent on the decision and whether Governor Lee retains his earlier hawkish tone.”

A hike this year would put Korea in the vanguard of regional policy normalization, along with New Zealand which could also be headed for an early tightening. How such a move would affect capital flows, inflation and economic growth against the backdrop of still-loose global settings would be closely watched by international counterparts.

The odds of the BOK tightening as early as August have eased since daily virus cases began to top 1,000. With South Korea’s vaccine rollout yet to reach most of the population, authorities have imposed their strictest social distancing rules to date in the greater Seoul area.

Still, the factors that brought about the BOK’s hawkish shift remain intact. Home prices are soaring, and an influx of retail investors into risky assets such as cryptocurrencies has made policy makers wary of maintaining such loose settings. The economy is growing faster than expected due to rallying exports and solid investment.

Swap markets are currently pricing in one rate hike in the next three months and almost three increases over the next 12 months.

The BOK will announce its decision at around 10 a.m. in Seoul on Thursday, followed by a policy statement. Lee holds a press conference at around 11:20 a.m., when the names of any dissenters would also be provided.

The yield on Korea’s three-year government bonds has risen more than 40 basis points this year, while the won weakened more than 5% against the dollar -- despite the rate-hike talk -- as the spread of virus variants spurred risk-off sentiment.

Increased curbs on activity add uncertainty to the BOK’s forecast for the economy to grow 4% this year. Still, with an extra budget proposal set to offer an additional fiscal buffer, Citigroup Inc. expects the growth hit will be limited to around 0.1-0.2 percentage points.

Despite the downside risk from the restrictions, GDP growth this year is still likely to exceed 4% as the overall recovery of consumption and services is unlikely to be derailed, according to Citi economists led by Kim Jin-wook.

©2021 Bloomberg L.P.

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