Photographer: SeongJoon Cho/Bloomberg

What to Watch for When South Korea Decides on Key Rate

  • All 19 economists in survey forecast keeping key rate at 1.25%
  • Economic data is mixed as growth improves amid weak inflation

The Bank of Korea is expected to keep its key interest rate unchanged at Thursday’s meeting, as recent data show a mixed portrait of the economy, with some favorable signs amid an exports slump and weak inflation.

All 19 economists surveyed by Bloomberg forecast that the BOK’s board will vote to hold the seven-day repurchase rate at a record low 1.25 percent, following its unexpected cut in June and a unanimous vote to hold in July.

South Korea’s growth improved in the second quarter and factory output was better than expected. Yet exports declined for a 19th straight month and inflation remains far below the central bank’s target. A supplementary budget that the finance ministry sees as important to an economic recovery is awaiting approval by parliament.

The central bank’s rate decision will be announced at about 10 a.m. in Seoul, followed by a monetary policy statement. If borrowing costs are left unchanged, the market’s attention will be on Governor Lee Ju Yeol’s press briefing, which starts at 11:20 a.m.

Here are key points to watch:

Economic Assessment

Comments from Lee that show optimism or pessimism about the economy will affect markets. Last month Lee made remarks that the previous rate cut and the government’s fiscal stimulus would support growth by about 0.2 percentage points.

Look for whether Lee comments on the possible impact of a delay in parliament’s approval of the 11 trillion won ($10 billion) supplementary budget. Though the government has urged speedy action, lawmakers haven’t approved it because of standoffs between members of the ruling party and opposition on issues such as deploying a U.S. missile shield.

Lee said last month that consumer prices will rise toward 1.5 percent by the end of this year and approach the 2 percent target in the first half of 2017. Still, data released Aug. 2 showed inflation at 0.7 percent remains far from that goal.

Won’s Strength

South Korea’s won has been the biggest gainer among Asian currencies in the past month, appreciating about 6 percent to 1,094.38 per dollar as of the market close Wednesday, according to prices from local banks compiled by Bloomberg. Currency strength won’t help the country pull out of its export slump.

Watch to see if Lee expresses concerns about the pace of the won’s appreciation or herd behavior in the currency market. An official at the central bank on Wednesday said authorities in South Korea are closely monitoring the market and can take stabilizing measures if volatility is excessive.

The announcement this week that Standard & Poor’s is raising South Korea’s sovereign credit rating to AA may support the currency appreciation trend by enhancing the attractiveness of won-denominated assets.

Possible Dissenter

Minutes from the BOK’s July decision -- when the board unanimously voted to leave rates unchanged -- showed one member saying that monetary policy should continue to be accommodative. Stephen Lee and Surbee Lee, analysts for Samsung Securities Co., wrote in a report that this view was close to a dissenting vote, and they expect a cut to 1 percent in September or October.

A dissenting vote on Thursday would bolster the view that a further rate reduction could be coming.

Of 27 analysts surveyed by Bloomberg from July 15 to July 21, 16 expected at least one more rate cut within the year. The rest projected no change in the benchmark rate.

South Korea’s three-year government bond yield closed at 1.22 percent on Wednesday, close to a record low, Korea Exchange prices show.

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