Bank of Korea Kim’s ‘Follow-Up Measures’ Spur Rate-Cut Optimism

Speculation is building that the Bank of Korea will lower interest rates as soon as next month after Governor Kim Choong Soo said the board discussed “follow-up measures” at a policy review today.

Korea Investment & Securities expects the first cut in three years to be announced in the third quarter, having previously forecast no change for the remainder of 2012, according to a research note published today. Daewoo Securities and Woori Investment & Securities forecast a rate cut will come as early as July.

The Bank of Korea left the seven-day repurchase rate at 3.25 percent for a 12th month today, a decision predicted by all 15 economists surveyed by Bloomberg News. Governor Kim said in a press briefing that while today’s decision was unanimous, discussion was held on measures to prepare for possible changes in the economy.

“That one word during press briefing - measures - was enough to make investors speculate that today’s rate decision may not have been unanimous,” Yoon Yeo Sam, a fixed-income analyst at Daewoo Securities in Seoul, wrote in a note to clients after today’s press briefing. “We expect the central bank to cut rates in July or August.”

Goldman Sachs Group Inc. disagrees. Seoul-based economists Kwon Goohoon and Cheong Sungsoo said the company continues to expect the central bank will leave rates unchanged until early 2013 given elevated inflation expectations, according to a note to clients. The governor’s tone turned more cautious from last month and he made it clear that there was no discussion about rate cuts, the economists wrote.

Bonds Gain

South Korea’s bonds gained as investors bet the central bank will lower rates to support growth. The yield on the 3.5 percent bonds due March 2017 dropped seven basis points, or 0.07 percentage point, to 3.35 percent, according to Korea Exchange Inc. prices. The rate reached 3.34 percent on June 4, the lowest level for a benchmark five-year note in Bloomberg data going back to August 2000.

“Traders were interpreting the governor’s comments on the board’s discussions as a rate-cut possibility,” said Huh Kwan, a Seoul-based bond trader at Korea Investment & Securities. “As short-term bond yields are already close to the benchmark rate, the yield curve is flattening with increasing demand for longer-dated bonds.”

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