Decision-Day Guide: Bank of Korea Meets as New Government Starts

  • All 20 economists in Bloomberg survey forecast no change
  • Lee’s assessment of household debt, economy are in focus

BOK Remains on Hold, Will Monitor Fed and New Government

The Bank of Korea’s policy board convenes to review the nation’s benchmark interest rate on Thursday, its first such meeting since President Moon Jae-in took office this month.

With analysts widely expecting no change in the key rate at this gathering and for the rest of the year, the focus will be on Governor Lee Ju-yeol’s press briefing and how he assesses Moon’s policies, including the administration’s plan for more fiscal spending. All 20 economists surveyed by Bloomberg expect no change at 1.25 percent on Thursday.

Surging household debt supports the view the BOK will remain on hold. Borrowings are a record 1,359.7 trillion won ($1.2 trillion) and lower rates would only make this worse, while a hike would add to debtors’ repayment burdens.

Given the new government’s concern over household debt and the Federal Reserve’s monetary policy normalization, the BOK is likely to leave the rate unchanged until the middle of next year, according to Kwon Young-sun, a Hong Kong-based economist for Nomura International.

The BOK typically announces its rate decision about 10 a.m. in Seoul, and issues statements on that and the economy soon after. Governor Lee’s press briefing starts from 11:20 a.m.

Here are the key points to watch:

Economic Assessment

The BOK last month raised its forecasts for 2017 growth and inflation, to 2.6 percent and 1.9 percent, respectively. Look out for any indications the central bank sees recent data as in line with the projections.

The economy has shown signs of improvement. Exports have posted double-digit growth and consumer sentiment has rebounded. Moon is pushing for an extra budget to create more jobs. If approved in the parliament, the budget would put upward pressure on the BOK’s growth outlook, which doesn’t include the possibility of supplementary spending.

Moon, who took office immediately after winning the snap election, is yet to introduce concrete policies. His pledges during the campaign included reforming the conglomerates, which lead the country’s exports and promoting income-led economic growth by creating more jobs.

Rate Path

Of 28 analysts surveyed by Bloomberg on rate projections through to the end of this year, 25 forecast no change at 1.25 percent; one expected a cut to 1 percent and two saw a 25 basis points increase as likely. The swap market is indicating the possibility of a 25-basis-point increase in the next year or two.  

If the government’s fiscal policies turn out to be “very stimulative,” a rate hike could happen earlier than Nomura’s base scenario for an increase in the second half of next year, wrote Kwon.

For now, household debt limits the BOK’s policy options. While a rate hike could rein in debt growth, that move is unlikely to come any time soon as the central bank worries about the debt burden of vulnerable households.

South Korea’s won appreciated 1 percent against the dollar this month and closed at 1,126.30 on Wednesday. The yield on three-year government bond was little changed during the same period at 1.69 percent

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