Decision-Day Guide: Bank of Korea Seen to Wait on Policy Changes

  • Economists in survey forecast no change in record-low rates
  • Analysts pushed back rate-cut call to 2016 after GDP bounce

Bank of Korea board members are gathering Thursday to review the benchmark rate after recent data showed that South Korea’s economy grew at the fastest pace in more than five years, prompting economists to hold off on predictions for a rate cut.

With all 18 economists surveyed by Bloomberg forecasting no change in the record-low 1.5 percent benchmark rate, Governor Lee Ju Yeol’s views on whether the economic rebound can be sustained and his assessment of risks from China will be in the spotlight. Economists also will be monitoring what he says about the effects of a potential shift in U.S. monetary policy.

Analysts at HSBC Holdings Plc, Nomura Holdings Inc., and Barclays Plc earlier this month pushed back their 2015 rate-cut forecast to 2016 after a 1.2 percent bounce in quarterly gross domestic product. The firms now project a 25 basis-point rate reduction within the first three months of 2016. Korea’s government bond yields rose this month as expectations for a cut in the benchmark rate faded.

The BOK’s rate decision, which is typically announced at about 10 a.m. in Seoul, will be delayed by an hour Thursday because of a late start owing to the national college-entrance exam. Statements on policy and the economic situation will follow, with Lee’s press briefing starting at noon. Here are the key points to watch:

Lee’s View on Exports

Korea’s economy in the third quarter expanded at the fastest pace since the second quarter of 2010, though exports remain a sore point. Overseas sales, which account for about half of GDP, fell every month in 2015 as the global economy slowed and low oil prices reduced revenue from petrochemical goods sales.

Sales to neighboring China, which accounts for about quarter of Korea’s exports, fell 8 percent in October from a year earlier as Chinese demand waned. Sales of most major export products fell in October, except for telecommunications devices that improved because of new smartphone releases, the trade ministry said.

Although Lee has said he’s not seeking to depreciate the currency or boost exports through shifts in monetary policy, weak shipments are a reason some economists say the central bank eventually will lower borrowing costs next year.

A stronger won against its major trading partners’ currencies and low commodity prices should have a negative effect on Korean exports, Kwon Young Sun, a Hong Kong-based economist for Nomura who forecasts two rate cuts in 2016, wrote this week.

Response to China

With China as its top trading partner, Korea’s export performance tends to track its neighbor’s economic growth and the won reflects the yuan’s movements. Lee said Oct. 28 that a hard landing of China’s economy is unlikely.

The BOK has taken the stance that monetary policy will remain accommodative even with a potential rate increase by the U.S. Federal Reserve and that it’s unlikely a major capital outflow from Korea would occur upon a Fed move. Whether Lee maintains that view as U.S. policy shifts become more imminent would be of interest to BOK watchers.

Policy Statement

Any changes in how the board assesses Korea’s economic conditions is key to understanding the central bank’s decision on whether or not to ease further and often helps predict future policy. In its September and October statements, the board said uncertainty over Korea’s growth path is high yet maintained the judgment that the economy will continue its recovery.

No change in this wording would suggest that the BOK is in a wait-and-see mode. A more upbeat assessment would further erode expectations of policy action, while increased warnings of risks to growth may put investors on alert for a possible policy shift in the near future.

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