Photographer: Jean Chung/Bloomberg

What to Watch for in the Bank of Korea’s Rates Announcement

  • Economists are unanimous in forecasting rates on hold at 1.5%
  • GDP, CPI projections are key to predicting next policy move

With the Bank of Korea widely expected to keep interest rates unchanged on Thursday, the focus will be on inflation and economic growth forecasts, which may determine the timing of the next hike in borrowing costs.

The policy decision will be the first since the central bank raised its benchmark rate to 1.5 percent in November, when it signaled that any future moves are likely to be gradual. All 17 economists surveyed by Bloomberg forecast no change.

The announcement typically comes around 10 a.m. in Seoul, followed by a policy statement that includes brief assessments of the economy and inflation. Governor Lee Ju-yeol, who will chair this meeting and one more next month before his term ends ends in March, gives additional details at a news conference starting at 11:20 a.m.

There are upside and downside risks for inflation. Rallying oil markets supporting higher prices, while the won’s rise to the strongest level in more than three years is starting to weigh on import costs.

If the BOK’s inflation forecast remains below its 2 percent target -- the current projection is 1.8 percent -- it will reinforce the view that the next rate increase is still some time away. The central bank has said it will maintain an accommodative stance this year because inflationary pressures won’t be strong despite steady economic growth.

Analysts at Nomura International Ltd. and Societe Generale SA are among those expecting the BOK to bump up its GDP forecast to 3 percent, from 2.9 percent now, putting the central bank’s outlook on par with the government’s.

Dissenting Vote

A majority of analysts expect the BOK’s next hike to take place in the second quarter or later, once a new governor is in place and policy makers have had more time to assess the impact of the first increase.

Oh Suk-tae, an economist at the brokerage unit of Societe Generale, and Shin Eol, an analyst at Shinhan Investment Corp., are among a handful of those who expect another rate increase next month.

"When starting to raise rates, the BOK will want to do it at least twice," said Oh. "It’s better to hike when the economy is in good shape, and Governor Lee may want another policy change before he leaves to maintain policy continuity as it’s unclear who his successor will be."

A dissenting voice at this meeting might signal a rate hike in February, Shin said. The BOK raised borrowing costs in November after one member dissented at the previous meeting.

Won, Capital Flows

Lee’s comments on the won and a possible rate hike by the Federal Reserve in March -- which would put the U.S. benchmark rates above Korea’s -- will be scrutinized for clues to the board’s thoughts. If Lee gives more attention to Fed rates and potential policy shifts at central banks in Japan and Europe, investors may read them as signs of growing hawkishness.

Lee has said the interest rate differential isn’t the sole factor that decides capital flows, and that while the exchange rate should be determined by the market, steps can be taken if volatility is excessive.

The won closed at 1,069.25 per dollar on Wednesday. The yield on three-year government bonds rose 10 basis points this month to 2.23 percent on Wednesday.

Lee is unlikely to comment on a potential successor, who will be chosen by the presidential office. The possibility of Lee serving a second term is low. No governor has done so since the 1970s.

— With assistance by Myungshin Cho

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