Korean Bonds Rally as BOK Cuts Forecasts After Holding Key Rate

Updated on

South Korea’s government bonds rose, reversing an earlier loss, after the central bank cut its economic forecasts and one policy maker sought further easing.

The three- and 10-year yields fell to records after the Bank of Korea kept its benchmark rate at 1.75 percent Thursday, and Governor Lee Ju Yeol said one board member called for a reduction. Asia’s fourth-largest economy will expand 3.1 percent in 2015, less the 3.4 percent growth projected in January, the BOK said in a statement. Consumer prices will rise 0.9 percent compared with an earlier estimate of 1.9 percent.

“The market was surprised to see a dissenter at today’s meeting, and that left the door open for additional easing by the end of June,” said Seo Hyang Mi, a Seoul-based fixed-income strategist at HI Investment & Securities Co. “The inflation forecast was cut significantly and the growth estimate lowered as expected. Economic data show little recovery momentum.”

The yield on the 2 percent notes due December 2017 dropped three basis points, or 0.03 percentage point, to 1.71 percent as of the 3 p.m. close in Seoul, Korea Exchange prices show. The three-year yield climbed as high as 1.75 percent before the rate decision. The 10-year yield fell three basis points to 2.08 percent. The yields are the lowest in data compiled by Bloomberg since 2000.

The BOK’s decision was predicted by all 16 economists surveyed by Bloomberg. Nine of 25 see the authority cutting the benchmark rate further this year, a separate survey shows. Lee, who unexpectedly lowered the rate from 2 percent in March, said the impact of that reduction will be seen in the second half and future policy moves will depend on how the economy performs.

The won weakened for a third day, declining 0.2 percent to 1,092.60 a dollar, data compiled by Bloomberg show. The currency’s three-day drop of 0.7 percent is the biggest since March 12.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE