Bank of Korea Decision-Day Guide: Look Out for Hawkish Comments

  • BOK is expected to hold key interest rate, raise GDP forecast
  • All 17 analysts expect the benchmark to be unchanged at 1.25%

The Bank of Korea logo is displayed atop the central bank's headquarters in Seoul.

Photographer: SeongJoon Cho/Bloomberg

South Korea’s central bank is expected to keep interest rates unchanged again on Thursday as military tension with North Korea continues to cloud the outlook.

But with most signs pointing to higher borrowing costs in the medium term, some analysts see the chance of a dissenting vote for a hike coming as soon as this meeting.

Governor Lee Ju-yeol, whose term ends in March, has himself indicated previously that the Bank of Korea’s next rate change would be an increase, although he emphasized that this would only come after the economy showed clear signs of recovery. Some economists also speculate that Lee may not want to saddle his successor with a record-low rate.

Still, all 17 analysts surveyed by Bloomberg expect the seven-day repurchase rate to remain at 1.25 percent on Thursday, unchanged since a cut in June 2016. The BOK will also update its economic projections. Its most recent forecasts for this year pointed to 2.8 percent growth in gross domestic product and 1.9 percent inflation, just shy of the 2 percent price target.

Swap market indicators have started to reflect the possibility of a 25 basis point rate hike in three months. A separate survey of analysts on longer-term projections show only six out of 22 see tightening by the end of the first quarter, and a majority look for the change by the second quarter and onwards.

The central bank typically announces its rate decision about 10 a.m. in Seoul, and releases a policy statement shortly after that includes brief assessments of the economy and inflation. Lee will offer additional details at a press briefing starting at 11:20 a.m.

Here are key points to watch:

Dissenting Vote

Analysts at Hana Financial Investment Co. and NH Investment & Securities Co. see the possibility that a minority voice may be raised on Thursday, as focus shifts to maintaining financial stability from keeping rates low to boost the economy.

“The BOK has been giving rate hike signals since June, and judging from recent comments it seems North Korea risk is the only hurdle for a rate change,” said Park Jong-youn, a fixed-income analyst for NH Investment & Securities in Seoul. “The BOK can give a stronger signal through the dissenting vote, paving the way for a rate hike in the near term -- it can be as early as next month, but most likely in the first quarter.” 

BOK board member Shin In-seok told reporters last month that current monetary policy is accommodative and that the key rate remains below the neutral rate.

Still, analysts at KB Investment & Securities Co. and Meritz Securities Co. think a dissenting vote at this meeting would be too early as there are uncertainties in the economy related with North Korea’s provocation and how the household debt problem will develop.

Growth Outlook

South Korea’s exports have been growing by double-digits this year, supported by a semiconductor boom. The value of overseas shipments in September reached an all-time record. This is one of the reasons many economists expect the 2017 growth outlook to be raised slightly to 2.9 percent or 3 percent. 

Any changes to the BOK’s economic outlook would depend on how it assesses the risks posed by North Korea’s threats rattling global markets and the extent of slowdown in the property market after government measures.

The yield on three-year government bonds rose 19 basis points in the past month to 1.94 percent as of the market close on Wednesday. The won weakened 0.3 percent during the same period to 1,130 per dollar.

— With assistance by Myungshin Cho

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