Outlook for BOK rate cut gets dimmer

By Kim Tae-gyu

The Bank of Korea (BOK) will find it harder to cut its key interest rate at a monetary policy meeting next month after the U.S. Federal Reserve hinted at a rate hike before the end of the year, analysts said Thursday.

The Fed’s freeze of its policy rate for September and projection of a hike in December came hours after the Bank of Japan (BOJ) maintained its key rate unchanged at negative 0.1 percent to help boost the economy there.

The Fed and BOJ’s monetary stances are sending confusing signals to global financial markets, complicating the BOK’s monetary policy.

Still, the Fed’s rate freeze for this month and stronger hint at a hike in December left analysts negative about the BOK’s rate reduction in the remainder of the year.

“The BOK will have to seriously consider its rate policy after the Fed indicated a tightening in December,” said Lee Jong-woo, research head at IBK Securities.

The BOK has kept its key rate unchanged at a record low 1.25 percent for three consecutive months.

BOK Governor Lee Ju-yeol has said the current rate is low enough to support the economy, citing soaring household debt as a major obstacle to adopting an easier monetary policy.

At the same time, a rate cut by the BOK will widen the gap with the U.S. interest rate, which could trigger capital flight out of the country.

However, some analysts said that the weak economy will force the BOK to cut its key rate.

“The sluggish economy will pressure the BOK to make a downward adjustment to the key rate although the level is already very low,” said Samsung Securities analyst Park Sung-hyun.

On top of sluggish domestic consumption, exports are showing a now meaningful rebound. In August, Korea managed to stop a 19-month skid in its exports on a year-on-year basis, but analysts continue their pessimistic outlook.

To breathe vitality into the economy, the National Assembly passed an 11 trillion won extra budget this month. However, most analysts say this is simply insufficient.

Worse, the anti-graft law, or the Kim Young-ran Act, which will be implemented Sept. 28, is expected to further weaken consumption.

The anti-graft law regulates not only public servants but also private school teachers, journalists, and their spouses, and is estimated to affect 4 million people.

Those subject to the bill cannot be treated to a meal costing more than 30,000 won ($26) or receive gifts over 50,000 won. Congratulatory or condolence money should be less than 100,000 won.

The BOK will convene a rate-setting committee meeting, Oct. 13.

Seoul stocks closed higher Thursday, boosted by the Fed’s decision to hold its key rate steady. The benchmark KOSPI closed up 13.71 points, or 0.67 percent, at 2,049.70.

The local currency gained against the dollar, trading at 1,103.30 won, down 16.80 won from the close at the previous session.