The Bank of Korea will probably join the government’s efforts to revive economic growth by lowering borrowing costs for the first time since May 2013.
Governor Lee Ju Yeol will cut the seven-day repurchase rate to 2.25 percent from 2.50 percent on Aug. 14, according to 13 of 15 analysts surveyed by Bloomberg. Two expect no change. Before last month’s review, all forecasters had accurately predicted the BOK will stay on hold. The gap between the three-year sovereign bond yield and the benchmark rate has narrowed to one basis point from 15 a month earlier.
Deutsche Bank AG and Goldman Sachs Group Inc. predict Lee will ease after the government cut its 2014 growth forecast and unveiled a 11.7 trillion won ($11.3 billion) spending plan. President Park Geun Hye called for “all measures” to prevent the nation from entering a “long tunnel” of depression, after she picked Choi Kyung Hwan to head the finance ministry. The two institutions agreed to share views on the economy.
“With the government’s push for growth, it would be difficult for the central bank to not cooperate,” Seong Kiyong, a Deutsche Bank rates strategist in Hong Kong, said in an Aug. 7 phone interview. “A rate cut is unlikely to have a significant effect on the real economy, but would help to reverse the downturn in economic sentiment.”
The German lender expects the BOK to pause after cutting the benchmark rate by a quarter percentage point this week. Goldman Sachs, which like Deutsche Bank had previously expected no change in borrowing costs this year, also predicts a 25 basis-point cut, Seoul-based economist Kwon Goohoon said.
The BOK’s policy guidance has shifted from indicating tightening to easing after domestic consumption fell as the nation went into mourning after a ferry disaster in April killed almost 300 people. A stronger won also contributed to declines in earning of exporters such as Hyundai Motor Co. and Samsung Electronics Co.
Governor Lee said after policy reviews in April and May that the next rate move would be “upward” if inflation pressure were to build and the economy grew as projected. He stepped back from his stance on July 10, when the central bank cut its 2014 gross domestic product growth forecast to 3.8 percent from 4 percent, citing downside risks.
The finance ministry lowered its GDP estimate to 3.7 percent from 3.9 percent on July 24. Preemptive measures such as lowering borrowing costs should be considered to boost domestic demand, Kim Moo Sung, leader of the ruling Saenuri Party told a meeting the next day, according to its website.
The expected rate cut won’t create any market volatility, Mark Mobius, executive Chairman of Templeton Emerging Markets Group, said in an interview in Seoul yesterday.
Asia’s fourth-biggest economy grew 0.6 percent in the second quarter from the previous three months, the slowest pace in more than a year, central bank data show. Private consumption shrank 0.3 percent in the same period. The won strengthened 5.2 percent against the dollar in the quarter, the most in Asia, and has since weakened 1.6 percent to 1,028.55 as of 11:03 a.m. in Seoul in the region’s worst performance.
Overseas shipments rose 5.7 percent in July from a year earlier, official data show. The increase was the biggest since April and exceeded the 3.8 percent median estimate in a Bloomberg News survey.
“A cut, if they allow it, will be to show solidarity with the direction of government policies,” Wai Ho Leong, a Singapore-based economist at Barclays Plc, said in an Aug. 6 e-mail interview. “With the external outlook brightening, there is less need for lower rates.”
South Korea’s consumer prices rose 1.6 percent from the previous year in July, trailing the central bank’s target range of 2.5 percent and 3.5 percent. Downside risks to inflation are greater than the upside, the Bank of Korea said in a bi-annual report on price trends released July 31.
Hanwha Investment & Securities Co. expects Governor Lee to keep its rate unchanged this week and comment on prices to set the stage for a reduction at the September policy review, according to Kong Dong Rak, a Seoul-based fixed-income analyst.
“I expect the governor to comment on tackling low inflation on Aug. 14, which will be accepted as guidance for future rate cuts,” Kong said in an Aug. 8 phone interview.
The yield on three-year government bonds fell to 2.47 percent on July 23, its first drop below the benchmark rate since May 2013, when the central bank last reduced rates. It was at 2.51 percent today. The 10-year yield fell to a 14-month low of 2.95 percent on July 17 and is at 3.05 percent today.
“Bond market volatility may increase depending on the governor’s comments, but I don’t think he will spur further rate-cut speculation considering the overall economic situation,” Kim Chang Seob, a Seoul-based team head of fixed income at Shinyoung Asset Management Co., which oversees 11.5 trillion won, said by phone yesterday. “The three-year yield has stayed near 2.5 percent for some time, which shows investors mostly expect only one cut.”