Decision-Day Guide: BOK Likely to Hold Rate; Watch for Dissent

  • Analysts expect key rate will be lowered in coming months
  • Only one of 18 economists forecasts a change at this meeting

While most analysts aren’t forecasting that the Bank of Korea will lower interest rates at its policy meeting Thursday, investors expect action in coming months to tackle low inflation and risks to growth from corporate restructuring.

South Korea’s government bond yields fell to record lows this month after minutes of the May meeting showed that one board member called for a rate cut in the near term, and another said macroeconomic conditions suggest room for an adjustment in borrowing costs. On Wednesday, the government announced measures to facilitate corporate restructuring, leading to some speculation that the central bank may cut as soon as this meeting to coordinate with the government.

Seventeen of 18 analysts surveyed by Bloomberg expect the board to stand pat this month as the Federal Reserve’s rate decision and the U.K.’s vote on whether to exit the European Union near. Goldman Sachs Group Inc. was the sole forecaster of a cut in June. Nomura Holdings Inc., Natixis Asia Ltd., Citigroup Inc., and HSBC Holdings Plc are among those predicting a cut in coming months.

“A move this month can’t be excluded with the government’s announcement on corporate restructuring made earlier and the reduced possibility of a Federal Reserve rate hike in June,” said Lee Surbee, a fixed-income analyst for Samsung Securities Co. in Seoul. “Given that the BOK hasn’t given prior signals of a cut, the most likely scenario is having one of two dissenters at this meeting and then lowering in July.”

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.

The benchmark rate is currently at a record-low 1.5 percent.

Here are key points to watch:

Who Dissents

Even if the BOK decides to hold this month, there could be two dissenters voting for a cut right away. That’s based on views revealed in the minutes of May’s meeting, according to Yoon Yeo Sam, a fixed-income analyst for Mirae Asset Daewoo Securities. Governor Lee will announce the name of any dissenters during his press briefing after the decision.

Judging from past experience, the BOK board tends to cut rates within a few months of a dissenting vote. Board members Cho Dong Chul, Shin In Seok, and Koh Seung Beom are seen as possible dissenters, based on their previous background of working in the government or at state-run think tanks.

The BOK has surprised markets with an unexpected cut before, such as the move in March 2015 when only two of 17 analysts surveyed had predicted the change.

Growth, Inflation

With the BOK’s updated economic outlook due in July, Governor Lee may signal that a downward revision is likely, bolstering the case for further easing.

How Lee views the economic impact of corporate restructuring also will be closely watched. With government efforts to streamline businesses at shipping and shipbuilding companies, the capacity utilization rate in the manufacturing sector and corporate investment rate fell to post-financial crisis lows.

If inflation in June is again below BOK’s 2 percent target, Lee will have to explain why in press briefing while also setting out how he will raise price pressure. The enhanced accountability measures the BOK is taking as it tries to reach the target was one reason for Goldman to predict a cut this month.

Market Reaction

Korea’s three-year bond yield closed at a record low of 1.39 percent on Wednesday.

Samsung Securities’ Lee expects three-year bond yields to rise only slightly even if the decision turns out to be a hold as the market will take a cut in July as for granted.

If the BOK cuts at this meeting, yields could rise about 4 to 5 basis points as investors would expect no more cuts in the near term. Still, a sustained rise in yields is unlikely as some see another cut in the second half of the year if economy deteriorates, according to Samsung’s Lee. 

The won has appreciated 3 percent against the dollar so far in June as expectations of a near-term rate increase by the Fed evaporated.

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