Bank of Korea Decision-Day Guide: Three Briefings to Watchby
17 of 18 economists in survey forecast rate to stay at 1.25%
Central bank also releases updated quarterly economic outlook
With the Bank of Korea widely forecast to hold its key interest rate at a record-low 1.25 percent on Thursday, investors will focus on three briefings during the day for clues to future decisions.
After the rate decision is announced at about 10 a.m. in Seoul, Governor Lee Ju-yeol will hold a briefing at 11:20 a.m., in which he will release revisions to the BOK’s quarterly outlooks for inflation and economic growth. At 2 p.m., Lee will appear before the media again to explain why inflation has trailed the central bank’s 2 percent target. Then at 3 p.m. senior research officials will provide more details on the quarterly economic outlook.
All but one of the 18 analysts surveyed by Bloomberg forecast the rate to remain at 1.25 percent for a fourth straight month, with the lone dissenter predicting a cut to 1 percent. Nomura International, Goldman Sachs Group, and Samsung Securities are among those who recently pushed back or scrapped projections for further monetary easing this year, citing reasons including high household debt and a possible rate hike in the U.S. Lawmakers have also done an about-face and are calling for caution about cuts.
Here are key points to watch:
Governor Lee typically drops hints in advance if revisions are likely be large. He hasn’t done that this time, so changes are likely to be modest. Lee said in September that growth in gross domestic product so far this year was in line with previous projections. In a parliamentary audit last week he indicated the inflation forecast for 2016 will be lowered to 1 percent from 1.1 percent.
In July, the BOK forecast GDP growth of 2.7 percent and 2.9 percent for 2016 and 2017, respectively. It estimated consumer prices would rise 1.9 percent next year.
If economists believe the central bank’s revised figures are too optimistic, this could renew speculation about another rate cut meant to meet the projections.
While the BOK and the finance ministry remain confident about the economy this year, risks remain high. An anti-graft law that took effect last month is likely to hit retail sales and food producers, while corporate restructuring is weighing on the job market, investment and production.
The extent to which Lee stresses rising household debt will be a point to watch at his 11:20 a.m. briefing on the policy decision. He told reporters in Washington last week that while there was room to move monetary policy, a cautious approach was needed because of the financial risks related to the debt, Yonhap News reported.
The comments also echoed concerns raised by both ruling and opposition party lawmakers during the parliamentary audit, when both sides blamed the central bank for causing a debt binge by cutting borrowing costs too much.
Since four new members joined the board in April, all decisions have been unanimous. Any dissent today would spur speculation that a near-term rate cut is possible.
While inflation remains below the 2 percent target, BOK officials have made it clear that their target is a mid-term goal, and that an immediate policy response is not necessarily warranted. The consumer-price index rose 1.2 percent in September from a year earlier.
If Lee reiterates that inflation will rise close to 2 percent in 2017, this would signal the central bank’s preference to keep rates unchanged.