Photographer: SeongJoon Cho/Bloomberg

Korea Decision-Day Guide: BOK Meets as North Tension Escalates

  • All 19 economists expect key rate to be unchanged at 1.25%
  • Focus to be on governor’s comments for cues on future policy

Start your day with what's moving markets in Asia. Sign up here to receive our newsletter.

With South Korea’s central bank widely expected to keep interest rates unchanged on Thursday, Governor Lee Ju-yeol’s opinion on the economy will be heavily scrutinized for signs of future policy change.

Lee and the board meet as a series of events outside the control of the Bank of Korea make it harder to regulate and forecast the economy. Risks include North Korea’s missile threats rattling markets and domestic property regulations, which may hurt construction activity. Government efforts to boost spending and a continued recovery in exports provide some positive balance to the picture.

All 19 economists surveyed by Bloomberg expect the BOK to hold the seven-day repurchase rate at 1.25 percent on Thursday. While the consensus is that the central bank’s next policy change will be a rate increase, not a cut, there is wide disagreement as to when the change will take place. 

The rate decision is typically announced at about 10 a.m. in Seoul, and the central bank releases statements on this and the economic situation shortly afterwards. Governor Lee will hold a news conference beginning at 11:20 a.m.

Lee’s Assessment

If Lee gives an upbeat assessment on the economy or shows heightened concerns over the property bubble and rising debt, investors might regard this as signaling that the central bank can raise rates earlier than expected.

On the other hand, if he highlights the risks facing the economy, that may suggest the rate will be on hold for some time.

In addition, “there is huge interest in whether there will be a dissenting voice for a hike at this meeting,” said Lee Mi-seon, a fixed-income analyst for Hana Financial Investment. “If there is, then markets will immediately start to price in the possibility of a rate hike this year.”

North Korea

While the impact of North Korea’s provocations have so far been limited to market volatility, some economists have started to see the risks differently. The view is that tension persisting at elevated levels can hurt domestic sentiment and cause companies to postpone investment plans.

The BOK also cited geopolitical risk as one of the uncertainties to the economy in a statement to lawmakers this week. Investors will be keen to hear any comments from Lee on how North Korea risks affect the economy and how the central bank is preparing to tackle market volatility.

Fiscal Policy

Governor Lee has repeatedly said that fiscal policy needs to play a more active role in supporting the economy, and so any comments from him on the 7.1 percent jump in spending planned for next year will be interesting. The government’s proposal was released this week, with the biggest increase in spending planned since the 2009 global financial crisis.

“The budget for next year gives the BOK some flexibility in managing monetary policy, and it could consider a hike in concert with the government’s efforts to contain household debt and cool property prices,” Hana’s Lee said.

The budget still needs to get through an opposition-dominated parliament.

South Korea’s won weakened 0.5 percent this month to 1,124.35 per dollar at the market close on Wednesday. The yield on three-year government bonds rose two basis points during the same period to 1.75 percent.

— With assistance by Myungshin Cho

    Before it's here, it's on the Bloomberg Terminal.