Bank of Korea Holds Rate, Flags Risk From Corporate Overhaul

  • Decision to keep interest rate at record-low was unanimous
  • Friday meeting was first rate decision for four new members

Nomura: BOK Will Cut Interest Rates in July

South Korea’s central bank held the benchmark interest rate unchanged for an 11th consecutive month as a newly composed board opted to monitor economic data and the progress of corporate restructuring before changing policy.

The board’s decision to keep the seven-day repurchase rate at a record low 1.5 percent was forecast by 15 of 18 economists in a Bloomberg survey. Three projected a cut to 1.25 percent. Friday’s policy meeting was the first rate decision for four of seven BOK board members, who joined on April 21. Governor Lee Ju Yeol said in press briefing that the decision to hold was unanimous.

The central bank will closely monitor progress of efforts to restructure highly indebted companies, and will be mindful of this as it conducts interest-rate policy, Lee said. Although most analysts predicted no policy change at Friday’s meeting, HSBC Holdings Plc, Citigroup Inc., and Nomura Holdings Inc. are among those forecasting rate cuts in coming months. The most recent data showed exports continuing to fall and factory output dropping, while sentiment improved.

“A rate cut is likely in June or July when the government will probably push for a supplementary budget,” said Yoon Yeo Sam, a fixed income analyst for Mirae Asset Daewoo Securities. By then, the BOK and the finance ministry will probably emphasize a “policy mix” and announce measures to support growth, he said.

Current level of the key rate is “not insufficient to support the economy,” the governor said. Lee cautioned against interpreting comments on the level of the key rate as a signal for future policy decisions and indicated that the board has lowered the rate in the past to make it even more accommodative.

Corporate Restructuring

Uncertainties surrounding South Korea’s growth path are still high, the central bank said in policy statement after the decision. Deterioration in investor sentiment due to corporate restructuring is likely to be a downside risk to growth path, a separate statement on the economy showed.

With the government’s push to streamline indebted and unprofitable companies, analysts are forecasting that the central bank will reduce rates before long to combat risks during the restructuring, in addition to providing capital to policy banks. 

Of 23 analysts surveyed by Bloomberg in April, 12 forecast at least one rate cut in 2016, 10 predicted no change, and one projected a 25-basis point increase. Citigroup said in a report earlier this month that it expects a supplementary budget and a BOK rate cut in the next few months to support those losing jobs during corporate restructuring and to ease companies’ financial difficulties.

Record-Low Yield

Government bond yields had fallen to record lows this week with the three-year yield reaching an unprecedented 1.41 percent on Monday. The yield rose one basis point on Friday to 1.44 percent as of 12:21 p.m. in Seoul, Korea Exchange prices show. The won weakened 0.3 percent to 1,166.41 on Friday, taking this month’s loss to 2.3 percent, one of the worst performers in Asia.

Exports declined 11 percent in April from a year earlier, for a 16th consecutive monthly drop, and factory output unexpectedly fell in March. Consumer prices rose 1 percent in April from a year earlier, less than the central bank’s 2 percent target.

Investors are eager to know the policy stances of the new board members. Analysts have speculated that the new board will lean toward easing because most came from the government or had experience in state-run research institutes.

Before it's here, it's on the Bloomberg Terminal.