Photographer: SeongJoon Cho/Bloomberg

Korea Decision-Day Guide: Focus on BOK’s Outlook for 2017

  • All 21 analysts surveyed by Bloomberg expect no change in rate
  • Central bank expected to cut growth outlook for this year

The Bank of Korea is widely expected to leave its policy rate unchanged Friday, even as it cuts its growth forecast for this year.

Investors will focus on the extent of the expected revision, as well as Governor Lee Ju-yeol’s comments on the central bank’s efforts to support growth while maintaining financial stability at a time of record household debt.

All 21 economists surveyed by Bloomberg expect the policy board to hold the seven-day repurchase rate at a record-low 1.25 percent.

The BOK will announce its rate decision at about 10 a.m. in Seoul, and will issue a statement soon after. In its plan for 2017, the central bank said it would change the way it writes its statements beginning this month, to offer clearer explanations and stronger policy signals.

Here are the key points to watch:

Growth, Inflation

Lee said in late December that the economy in 2017 would likely grow less than the 2.8 percent the central bank had forecast in October, signaling a downward revision to the BOK’s quarterly projection this month.

South Korea’s finance ministry last month cut its 2017 growth forecast to 2.6 percent from 3 percent. Economists surveyed by Bloomberg also forecast an expansion of 2.6 percent. 

The BOK may only trim or even maintain its 2017 inflation forecast of 1.9 percent, given rising oil prices and expectations of a base effect underpinning inflation due to weak price gains last year. The government sees 1.6 percent inflation for 2017.

Policy Signals

Lee has been forced to strike a balance between supporting growth and maintaining financial stability, a stance made a bit easier by upbeat economic data in recent months. But with growth still slowing, investors will be eager to hear what Lee emphasizes after the meeting.

Signs that Lee is more concerned about household debt or potential capital outflows resulting from Federal Reserve rate increases would indicate that the BOK isn’t considering additional easing in the near term. 

Lee has previously said rapid capital outflows didn’t seem likely even if the spread between Korean and U.S. benchmark rates narrowed. It’s worth looking out for any changes to this view, especially as Korean bonds now yield less than U.S. securities, even for five-year debt.

Economists at Societe Generale SA and Goldman Sachs Group Inc. were among those who recently pushed back their projected timing of rate cuts, citing the BOK’s focus on financial risks. Societe Generale now sees two cuts of 25 basis points each during the second half of the year. It said recent dollar strength versus the won had reinforced concerns over capital outflows.

The won weakened 1.4 percent over the past month to 1,184.88 per dollar as of 3:30 p.m. on Thursday in Seoul, making it the biggest loser among major Asian currencies. The yield on five-year government bonds fell 18 basis points to 1.79 percent, Korea Exchange data show.

— With assistance by Myungshin Cho

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