Photographer: SeongJoon Cho/Bloomberg

Scandal-Hit South Korea Looks Set to Keep Rates on Hold

  • All but 1 of 19 analysts forecast no change in rates on Friday
  • Focus turns to governor’s view on impact of Trump, Park’s Woes

For investors watching the Bank of Korea’s monetary policy meeting on Friday, the focus will be on Governor Lee Ju-yeol’s take on the economic impact of political changes in the U.S. and South Korea, rather than the benchmark interest rate, which is expected to remain unchanged.

Lee’s comments will be scrutinized for clues to the direction of policy after global markets seesawed on the U.S. presidential election. Citibank Korea has estimated that protectionist trade policies by Donald Trump could cut growth in South Korea by 0.6 percentage point next year.  

Eighteen of 19 economists surveyed by Bloomberg forecast the seven-day repurchase rate to remain at a record-low 1.25 percent, a fifth month of no change. Analysts point to the likelihood of board members opting to wait to gauge the impact of a potential rate increase by the Federal Reserve in December, as well as developments in domestic and U.S. politics.

The BOK’s decision will be announced at about 10 a.m. in Seoul. Policy statements will follow, and then Governor Lee will hold a news conference beginning at 11:20 a.m.

Here are key points to watch:

Debt vs Economy 

South Korean bond yields had risen steadily in the past few months, partly on expectations that soaring household debt would limit further monetary easing, but Trump’s election has increased uncertainty about the nation’s economic outlook. He’s taken issue with the trade pact between the two countries and said South Korea needs to shoulder much more of the financial burden of hosting American military forces. If the economic outlook deteriorates, the BOK could face no other option than another cut in borrowing costs.  

Trump’s victory adds to substantial downside risks for South Korea,  Kwon Young-sun, an economist at Nomura International, wrote after the election. He forecasts two rate cuts in 2017. This contrasts with Mirae Asset Daewoo, which now sees more uncertainty surrounding its projection for a 2017 rate cut. 

Domestic Politics

All this comes on top of a home-grown political scandal in South Korea. The economy has been left with no clear leadership as protesters demand President Park Geun-hye’s resignation, and after lawmakers rejected her pick for a new prime minister, in turn casting doubt on her choice of a new finance minister.

Analysts are split as to how the political scandal rattling Park will affect monetary policy. Royal Bank of Scotland, the sole forecaster of a rate cut Friday, sees the need for more monetary easing because political problems make it harder to deploy fiscal stimulus. Bank of America Merrill Lynch said the turmoil adds to the need for the BOK to stay pat and ensure financial market stability.

Lim Ji-won, an economist for JPMorgan Chase Bank, said while Trump’s election will affect financial markets, domestic politics is expected to have a bigger impact on the economy. Lim said the BOK is likely to lower its 2017 economic growth outlook in the first quarter and to cut the key rate.

Market Volatility

Governor Lee said earlier this year that cutting the policy rate could bring unexpected side effects in times of external economic instability. He has repeated this stance a couple times.

The won posted its biggest one-day slump since August on Wednesday, and closed little changed on Thursday. Bonds seesawed over the two days, with the yield for 10-year rising 14 basis points Thursday to 1.82 percent.

Lee is likely to repeat comments he made in recent statements that the central bank is ready to take market stabilizing steps as needed.

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