Korea's Tepid Job Growth Points to Central Bank Standing Pat

(Bloomberg) -- Bank of Korea watchers are growing less confident that the central bank will increase interest rates again in the coming months.

Analysts at Societe Generale SA, Australia & New Zealand Banking Group, and Goldman Sachs Group were among those who either withdrew their call for a rate hike this year or pushed back their projected timing, citing moderating export growth and tepid job creation. All 18 analysts surveyed forecast no change in the 1.5 percent benchmark rate on Thursday.

BOK Governor Lee Ju-yeol said last week that it’s difficult to remain optimistic about the economy, citing weak job creation as one concern. This came just days after President Moon Jae-in’s senior economy adviser warned that the economy may be entering a slump.

“There are plenty of reasons for the BOK to hold this year and the central bank sounds less confident on the economy,” said Oh Suk-tae, an economist for SG Securities in Seoul, a unit of Societe Generale SA. “The only reason for a hike would be a widening rate gap with the Federal Reserve, but the BOK has previously said they won’t hike just for that.”

Jobs, Exports

The latest economic data give reason to be worried. Inflation remains below the 2 percent target. In April, exports contracted for the first time since 2016 and job creation slowed to less than a third of that seen during the same month a year earlier. Industrial output declined more than expected in March.

The parliament’s approval of 3.8 trillion won ($3.5 billion) extra budget on Monday is unlikely to stimulate the economy, but underscores lawmakers’ concerns about the job market, according to Oh at SG Securities.

While the unemployment rate remained stable in April, the number of people employed increased by only 123,000 from a year earlier, when it rose by 420,000.

“Recent numbers in employment data suggest that the adjustment in the minimum wage earlier this year had an adverse effect on job creation,” said Eugenia Victorino, an economist for ANZ. “Overall, we see fading strength in economic activity and justifying another 25 basis points in the interest rate as difficult.”

Goldman Sachs, which recently changed its projection for the next rate hike to October from July, sees Korean exports as “particularly vulnerable” to downside risks in the tech cycle, noting the semiconductor industry’s large contribution to the country’s economy.

Dissenting Vote?

Some analysts point to the possibility of a dissenting vote this week, which could pave the way for a near-term rate hike. Two members said at the April rate decision that the BOK needs to increase rates at the appropriate time to prevent the risk of financial instability from growing, according to minutes from the meeting. The nation’s record level of household debt is steadily rising.

“There is a possibility that those hawkish members in the minutes may focus more on the rise in household debt and the likelihood of the economy and inflation improving later this year,” Surbee Lee, a fixed-income analyst at Samsung Securities Co., wrote in a report.

If the BOK leaves its key rate unchanged on Thursday and the Fed raises the upper bound of its range in June to 2 percent, as expected, the gap between the two countries’ benchmark rates would widen to 50 basis points. Governor Lee has previously said Korea’s current-account surplus and foreign-exchange reserves would prevent any rapid capital outflows -- but also that he’s unsure if the BOK can manage a large rate gap for long.

The U.S. dollar was little changed versus the won on Wednesday, trading at 1078.90 at 9:56 a.m. in Seoul.

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