Korea Decision-Day Guide: BOK Meets After Park’s Impeachment

Updated on
  • Board convenes shortly after Federal Reserve rate decision
  • Economists surveyed predict no change in BOK benchmark rate

The Bank of Korea’s interest-rate decision on Thursday is its first chance to review monetary policy after parliament voted to impeach President Park Geun-hye over a political scandal, another blow to an economy already struggling with weak growth.

With the central bank unanimously expected to hold the key policy rate at a record low, investor focus will be on any comments from Governor Lee Ju-yeol assessing how the political turmoil is affecting the economy, and whether Lee signals willingness to take further action.

All 19 analysts surveyed by Bloomberg forecast the seven-day repurchase rate will be held at 1.25 percent. The decision comes only hours after the Federal Reserve increased rates for the first time this year. The BOK board may want to watch the effect of the Fed’s move on global markets before any change in its own policy.

The 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 the key points to watch:

Impeachment Impact

After parliament voted to impeach Park, the BOK said that political uncertainty could increase market volatility and risks to the economy. With the central bank scheduled to release updated economic projections in January, the governor may signal at his press conference if significant downward revisions are likely.

It’s also worth noting whether Lee comments on recent statements from the finance ministry and state-run think tank Korea Development Institute, which said that the BOK has room for additional easing. While the central bank is independent, there were times in the past when a rate cut coincided with calls for easing from politicians, senior government officials, or the KDI.

KDI said on Dec. 7 that prolonged political uncertainty can hurt economic growth by a “large extent,” but that the negative impact can be offset by additional fiscal spending and rate cuts. Finance Minister Yoo Il-ho stressed after the vote that the country has room to use both fiscal and monetary policies, and said this week the government would front-load spending next year to help the economy.

Fed Decision

The Fed raising rates and forecasting a steeper path for borrowing costs in 2017 puts the BOK in a difficult position, as it has to decide whether to follow the U.S. to reduce risks of capital outflows, or maintain low rates to support the economy.

Lee has previously said that the BOK doesn’t need to raise immediately after Fed, but he has also said South Korea needs higher rates than key currency nations. Investors will be watching for any new comment from Lee on this.

Of 29 economists polled by Bloomberg earlier this month, 18 expected at least one more cut by the end of 2017. Nine see no change, while two forecast an increase to 1.5 percent.

The won weakened 5.9 percent this quarter, making it one of the worst performers in Asia. The yield on five-year government bond rose 58 basis points during the same period to 1.83 percent on Wednesday.

(Updates with Fed rate decision in 3rd paragraph.)
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