Decision-Day Guide: Debt Likely to Give Bank of Korea Pause

  • BOK expected to hold benchmark rate ahead of Fed meeting
  • All but one of 32 analysts surveyed forecast no rate cut

The Bank of Korea is expected to hold its key interest rate steady on Friday as policy makers weigh the risks of record household debt against sagging inflation.

All but one of 32 economists surveyed by Bloomberg predicted the BOK will keep its benchmark rate at a record-low 1.25 percent. The sole prediction for another cut, to 1 percent, came from National Australia Bank.

Uncertainty about whether the Federal Reserve will raise rates at its Sept. 21 policy meeting is seen as complicating the BOK’s decision.

South Korea’s household debt hit 1,257.3 trillion won ($1.15 trillion) at the end of June. BOK board members noted at their meeting in August that extreme levels of debt can limit consumption, and called for policies to increase the quality of that debt, minutes of the meeting showed.

The BOK’s rate decision will be announced at about 10 a.m. in Seoul. A statement will follow. Governor Lee Ju Yeol will hold a news conference beginning at 11:20 a.m. 

Here are key points to watch:

Growth, Inflation

Policy makers have sought to temper optimism after exports improved in August and industrial output topped expectations in July. The trade ministry says last month’s rise in exports -- the first in 20 months -- may not be sustainable. The government attributed the output improvement to temporary factors including higher production of TV sets ahead of the Olympics.

Inflation has been slowing this year. The consumer-price index registered 0.4 percent in August, the lowest level in more than a year and far from the central bank’s 2 percent target. Although price weakness in August was largely the result of a temporary reduction in electricity fees, economists at Nomura Holdings and Goldman Sachs Group said the reading justifies their calls for a rate cut this year.

An anti-graft law that imposes strict limits on expensive meals and gifts for public officials -- and is expected to dent consumption -- takes effect later this month. Corporate restructuring is reducing employment and hurting regional economies.

Currency Volatility

South Korea’s currency and bond prices have seen swings over the past month as expectations for a September rate hike by the Fed have risen and fallen.

The won gained 2.3 percent this week to 1,092.55 per dollar on Thursday, and ranks as the best performer in Asia over the past three months. The currency tends to move during Lee’s briefings if he expresses concern about excessive strength or weakness.

The yield on South Korea’s three-year bond fell four basis points this week to 1.29 percent on Thursday, after rising last week.

Dissenting Voice

The newly composed BOK board has reached unanimous decisions since four members joined in April. Any dissenting vote for a cut Friday would be seen as a strong signal that the board may lower rates again in coming months.

In a survey on longer-term projections for the BOK’s policy rate, 13 of 24 analysts forecast a reduction to 1 percent by year-end. The rest projected no change.

Lee has surprised market participants in the past. Only one of 18 economists predicted the cut in June that brought the benchmark rate to its current level, while only two of 17 forecast the cut in March 2015.

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