Decision-Day Guide: BOK Expected to Hold Rate, Cut GDP Estimate

  • Governor Lee has already said growth is set to trail forecasts
  • 17 of 20 analysts see no rate change in April, three see cut

The Bank of Korea is widely forecast to keep its key interest rate unchanged at a record low Tuesday, while lowering its estimate for economic growth this year.

Seventeen of 20 economists surveyed by Bloomberg predict borrowing costs will remain at 1.5 percent, while three expect a cut to 1.25 percent. Policy makers recently have pointed to signs of improvement in South Korea’s economy, reducing the likelihood of a change in the benchmark this month. In addition, the terms of four of the BOK’s seven board members end on Wednesday and it’s thought they may not want to adjust borrowing costs immediately before stepping aside.

Governor Lee Ju Yeol said on March 30 that although growth this year is likely to fall below 3 percent projected in January, recent data shows confidence is edging up and exports are not as weak as before. This is in line with the finance ministry’s comments made in a monthly report that there are signs of economic improvement.

The BOK will announce its policy decision about 10 a.m. in Seoul, with a statement on the decision coming soon after. Governor Lee usually mentions revised growth and inflation outlooks during a press briefing that starts at 11:20 a.m. A detailed statement on the revisions is released later in the afternoon.

Here are key points to watch:

Growth and Inflation

All eyes will be on the growth forecast and how much the central bank reduces its estimates of 3 percent economic growth and 1.4 percent inflation for 2016.

A significant downward revision would bolster calls for additional rate cuts this year. While most economists project no rate change at the Tuesday meeting, DBS Group Holdings Ltd., HSBC Holdings Plc, and Nomura Holdings Inc. are among those predicting further easing in coming months.

HSBC wrote in an April 13 report that recent improvement in some economic data stems from stronger-than-expected orders and sales for new smartphones by Samsung Electronics and may not be sustained.

Factory output unexpectedly increased 2.4 percent in February from a year earlier, while exports were not as weak in March, falling about 8 percent after a 12 percent drop the previous month, data show.

Trinh Nguyen, an economist for Natixis Asia Ltd., said the central bank will monitor domestic and external conditions and save ammunition for when the economy really needs help.

Board Change

Board member Ha Sung Keun is among the four to vacate their seats after the Tuesday meeting. He was the sole dissenter who called for a 25-basis point cut in the past two months. 

The board includes the governor, senior deputy governor and five others recommended from such organizations as the finance ministry and chamber of commerce. The four new members will join BOK policy meetings from May.

With investors speculating that the new members are pro-growth and would favor more easing, rate-cut speculation is likely to intensify in coming months.

Ruling Party’s Suggestion

Governor Lee may offer his views on ruling Saenuri party’s election platform calling for aggressive action by the central bank, including more debt purchases to help funds flow to needed areas. He declined to comment on the matter before the poll, which took place last week.  

While Saenuri’s proposal may be stalled because the party didn’t win a majority of seats in parliament, lawmakers may still call for additional rate cuts as the post-election focus shifts to boosting the economy.

Finance Minister Yoo Il Ho said in an interview with Bloomberg last week that South Korea has room to lower borrowing costs and issue more debt if such expansionary policies are needed.

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