Decision-Day Guide: Bank of Korea's New Board in the Spotlight

  • 15 of 18 analysts forecast no rate change; three project a cut
  • Bond yields reach record lows as traders see cut coming soon

With most forecasters indicating the Bank of Korea won’t lower interest rates at its meeting Friday, investors will be seeking signals of change in coming months from a board with four new faces.

Fifteen of 18 analysts surveyed by Bloomberg expect the seven-member policy board to hold benchmark borrowing costs at a record-low 1.5 percent, while three project a cut to 1.25 percent. Despite the narrow odds for action at this meeting, South Korea’s government bond yields fell to record lows this week.

Traders are betting it won’t be long before a rate cut as economic data is not showing steady movement toward a recovery, leading the central bank to step in to ease financial market stress as corporate restructuring proceeds. However, the four new members who joined on April 21 may not be ready to make a change as soon as this month.

The decision will be announced about 10 a.m. in Seoul, followed by a monetary policy statement. Governor Lee Ju Yeol’s briefing usually starts about 11:20 a.m.

Here are key points to watch:

Policy Mix

Amid the South Korean government’s push to overhaul indebted and unprofitable companies, there’s considerable interest in how policy makers will come up with a mix of monetary and fiscal policy actions to facilitate the restructuring.

The government’s priority is to recapitalize state-run lenders that may see losses as troubled companies start their debt restructuring. Governor Lee has suggested a cautious approach for the central bank, which could involve lending to a separate entity that would then inject capital to policy banks.

Rate cut expectations are rising as the restructuring push may strain the corporate debt market and cause a cash crunch even for healthy companies. Korea’s three-year sovereign yield fell to a record low 1.41 percent this week and the five-year yield reached 1.52 percent.  

Potential Dissenters

Among those to leave the board last month were Ha Sung Keun -- who had opposed the decision to hold and called for cuts in February, March and April -- and Moon Woo Sik, known for his opposition to additional easing. Analysts will be watching for signs of opposition from the new board members; Lee identifies dissenters in his press briefing.

Cho Dong Chul, who joined the board from the Korea Development Institute where he was chief economist, has been seen as an advocate of further easing, as the state-run think tank has warned against deflation. Cho said in his inaugural speech that he feels a different amount of responsibility upon joining the BOK, and joked that while he is known as a pro-government dove, he has gained too much weight to fly.

Economic Outlook

The most recent data in South Korea shows a mixed portrait of the economy. Sentiment from consumers and businesses has improved, along with retail sales. Exports fell in April for a 16th consecutive month, weighing on factory output. Inflation remains below the central bank’s 2 percent target.

Natixis Asia Ltd. was one of the three firms to project a rate cut at this meeting, citing reasons including weak demand from China -- Korea’s biggest export market -- and a dip in industrial output. While the BOK emphasizes communication with markets, Lee made an unexpected move in March 2015 when the cut was predicted by only two of 17 analysts.

Lee said in April after lowering 2016 growth forecasts that the economy would gradually improve starting in the second quarter. Based on the BOK’s data-dependent stance, Lee’s comments on whether recent data are in line with central bank expectations would help predict future policy.

Market Reaction

If Lee emphasizes policy coordination with the government and says there is room to lower rates, or if a dissenter calls for a cut, the three-year yield could go below 1.4 percent, said Seo Hyang Mi, a fixed-income analyst in Seoul for HI Investment & Securities Co. If Lee shows a hawkish stance the yield would rise above 1.45 percent, Seo said. The rate was 1.43 percent on Thursday.

The won has weakened about 2 percent against the dollar this month -- one of the biggest losers among currencies in Asia -- as BOK rate-cut speculation spread while the Federal Reserve is seen as being on course to raise rates this year, supporting the U.S. currency.

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