Photographer: SeongJoon Cho/Bloomberg

Top Korea Rate Forecasters Divided on BOK Outlook as Yields Sink

Updated on
  • SocGen sees BOK on hold in 2016 as Credit Suisse predicts cut
  • Bond rally sends South Korea's sovereign yields to record lows

South Korea’s most-accurate interest-rate forecasters are divided on whether the central bank will ease policy in 2016 as a deepening export slump fuels a sovereign-bond rally that’s pushed yields to record lows.

While Credit Suisse Group AG, ranked first by Bloomberg for predicting Bank of Korea’s actions over two years, said in a Jan. 29 report it expects one reduction this year, second-placed Societe Generale SA says the nation’s mounting household debt will deter the authority from cutting its benchmark from an unprecedented 1.50 percent. The median forecast in Bloomberg’s latest survey is for the BOK to hold rates in Asia’s fourth-largest economy this year.

Bonds have rallied on bets that falling exports and a weak yen following the Bank of Japan’s decision to adopt negative interest rates will prompt the BOK to add to four rate reductions since August 2014. The government sold 30-year notes on Tuesday at the lowest yield to date, and three- and 10-year yields extended declines to previously unseen levels, a day after official data showed overseas sales fell for the 13th straight month in January.

“Just sluggish exports can’t push the BOK, and the market seems to be hasty in expecting a cut," said Oh Suk Tae, a Seoul-based economist at SG Securities Co., Societe Generale’s local unit. "The risk is too big as household debt is at a record. The BOK would need hard evidence and will wait for the first quarter’s gross domestic product data in April to assess the need for further easing."

Exports, Yen

January shipments from South Korea contracted the most since August 2009 and the BOJ’s stimulus worsened the export outlook as a weaker yen boosts the competitiveness of Japanese goods. The two nations compete globally to sell everything from cars to electronics. South Korea’s household debt rose to a record 1,166 trillion won ($966 billion) as of end-September, BOK data show.

The yield on won-denominated notes maturing December 2018 dropped one basis points to close at 1.52 percent in Seoul, Korea Exchange prices show, the lowest on record for a benchmark three-year security. The 10-year yield was little changed at 2.93 percent, after reaching an unprecedented 1.92 percent on Monday. It declined 14 basis points this year as global funds bought a net $388 million of local bonds.

The won fell 0.6 percent to 1,207.39 a dollar, data compiled by Bloomberg show. The currency has weakened 2.9 percent this year, making it Asia’s worst performer, following a 7.2 percent decline in 2015.

Increasing external uncertainties, including the BOJ’s stimulus, low oil prices and instability in Chinese markets, may weaken South Korea’s growth momentum, Finance Minister Yoo Il Ho said in Seoul on Tuesday. The ministry will consider if it’s necessary for its officials to attend the central bank’s Feb. 16 policy meeting and share views on the economic situation with BOK’s board, he said a day earlier.

“The Bank of Korea is likely to be particularly wary of the latest development in Japan, potentially prompting it to be more dovish in its monetary-policy stance and be more tolerant towards a weak won,” Credit Suisse analysts including Ray Farris in Singapore and Christiaan Tuntono in Hong Kong wrote last week’s report. “If external demand continues to stay weak and domestic demand momentum wanes, the chance of further monetary easing cannot be totally ruled out.”