By Choi Kyong-ae
The Bank of Korea is expected to hold its benchmark interest rate for this month, despite growing calls from politicians and businesses to lower the rate in order to boost sluggish domestic consumption following the April ferry disaster.
Domestic and foreign brokerages expected the Bank of Korea (BOK) to keep its key policy rate steady at 2.5 percent for the 14th consecutive month through July.
"This Thursday, it seems inevitable that the central bank will revise down the annual gross domestic product (GDP) growth to around 3.8 percent from the 4 percent it projected in April," Im No-jung, an economist at I'M Investment & Securities, said by telephone.
But a possible downward revision is not enough to cut the key rate. That's because the local economy entered a slow but steady recovery path in May from the impact of the Sewol's sinking. And an economic recovery will be led by exports from the second half, he said.
Foreign brokerages warned a rate cut might have unintended negative consequences on the Korean economy.
"If the BOK were to cut rates, it would boost Jeonse prices further, which could increase household debt and reduce consumption. This could increase risks that the Korean economy is falling into a debt trap," Kwon Young-sun, a Hong Kong-based economist at Nomura Holdings, said in a research note.
Jeonse is Korea's unique two-year lump sum security deposit for housing rental. Tenants usually rent a house for two years without paying monthly rent. On the termination date, the landlord repays the security deposit without interest to the renter.
"We are most concerned about the potential for the debt overhang to trap the Korean economy in a vicious cycle," said Kwon. "Lower interest rates could result in higher debt. Domestic demand then structurally weakens on increased loans by households and companies. The BOK can do little except maintain low interest rates to support a highly leveraged economy."
Nomura expected members of the BOK's Monetary Policy Committee members to "decide unanimously to put the policy rate on hold as macro and financial market data do not justify a rate cut."
As for a possible rate hike, HSBC pushed back the timing of a 25 basis point hike from the third quarter of 2014 to the first quarter of 2015.
HSBC Economist Ronald Man said in his research note, "Korea's economic data were not uplifting and BOK Governor Lee Ju-yeol's tone over the prospect of a rate hike has also softened." He also forecast that the bank will lower Korea's GDP growth forecast for the year to below 4 percent on Thursday.
The case for a policy rate cut is not sufficiently strong for three reasons: the policy rate was still deemed "sufficiently accommodative" by Governor Lee, meaningful government pressure on the central bank to cut its rate will likely be subdued and risks from a strong won have still not fully materialized, HSBC said.
Still, Woori Investment & Securities took a different stance toward the upcoming rate decision.
"There should be rate cuts not only to help boost the flagging economy but to keep the won's value from strengthening further. It is highly likely for the BOK to cut the rate in August after a revised economic outlook is released this Thursday," Peter Park, a fixed income analyst at Woori Investment, said.
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| BOK Governor Lee Ju-yeol |
Domestic and foreign brokerages expected the Bank of Korea (BOK) to keep its key policy rate steady at 2.5 percent for the 14th consecutive month through July.
"This Thursday, it seems inevitable that the central bank will revise down the annual gross domestic product (GDP) growth to around 3.8 percent from the 4 percent it projected in April," Im No-jung, an economist at I'M Investment & Securities, said by telephone.
But a possible downward revision is not enough to cut the key rate. That's because the local economy entered a slow but steady recovery path in May from the impact of the Sewol's sinking. And an economic recovery will be led by exports from the second half, he said.
Foreign brokerages warned a rate cut might have unintended negative consequences on the Korean economy.
"If the BOK were to cut rates, it would boost Jeonse prices further, which could increase household debt and reduce consumption. This could increase risks that the Korean economy is falling into a debt trap," Kwon Young-sun, a Hong Kong-based economist at Nomura Holdings, said in a research note.
Jeonse is Korea's unique two-year lump sum security deposit for housing rental. Tenants usually rent a house for two years without paying monthly rent. On the termination date, the landlord repays the security deposit without interest to the renter.
"We are most concerned about the potential for the debt overhang to trap the Korean economy in a vicious cycle," said Kwon. "Lower interest rates could result in higher debt. Domestic demand then structurally weakens on increased loans by households and companies. The BOK can do little except maintain low interest rates to support a highly leveraged economy."
Nomura expected members of the BOK's Monetary Policy Committee members to "decide unanimously to put the policy rate on hold as macro and financial market data do not justify a rate cut."
As for a possible rate hike, HSBC pushed back the timing of a 25 basis point hike from the third quarter of 2014 to the first quarter of 2015.
HSBC Economist Ronald Man said in his research note, "Korea's economic data were not uplifting and BOK Governor Lee Ju-yeol's tone over the prospect of a rate hike has also softened." He also forecast that the bank will lower Korea's GDP growth forecast for the year to below 4 percent on Thursday.
The case for a policy rate cut is not sufficiently strong for three reasons: the policy rate was still deemed "sufficiently accommodative" by Governor Lee, meaningful government pressure on the central bank to cut its rate will likely be subdued and risks from a strong won have still not fully materialized, HSBC said.
Still, Woori Investment & Securities took a different stance toward the upcoming rate decision.
"There should be rate cuts not only to help boost the flagging economy but to keep the won's value from strengthening further. It is highly likely for the BOK to cut the rate in August after a revised economic outlook is released this Thursday," Peter Park, a fixed income analyst at Woori Investment, said.
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