By Kim Jae-won
U.S. Federal Reserve Chair Janet Yellen’s hints of a rate hike later this year are expected to reduce room for the Bank of Korea to cut rates, economists said Friday.
They said the coming rate hike will also add further downward pressure on the Korean won against the dollar. However, they said the pace of depreciation of the local currency will not be steep because U.S. rate rise expectations have been factored in to some extent.
Hyundai Research Institute economist Hong Jun-pyo said the BOK will freeze its key rate at least to the end of the year.
He said economic data is not as bad as expected as private consumption is showing signs of a modest recovery in the second half.
“I don’t think the economy will get worse,” said Hong. “The data in general is good, including private consumption.”
He also downplayed worries over capital flight, saying foreign investors are unlikely to further pull their funds out of local markets.
“So, I expect the BOK to keep its key rate unchanged,” he said.
Ha Keon-hyeong, an economist at Shinhan Investment, said the won will remain weak against the dollar following Yellen’s hawkish comments.
“The dollar should continue to receive upward pressure as Yellen stressed the Fed’s plan to raise the interest rate this year,” Ha said in a report.
However, some analysts did not rule out the possibility of a BOK rate cut by the end of the year.
“It is better that the Fed makes a decision quickly,” said Jeong Yong-teak, an economist at IBK Securities. “If it delays a rate hike further, that will be worse by raising uncertainties.”
Jeong expects the BOK to cut its key interest rate either in November or December after it lowers its forecast for the nation’s economic growth to 2.4 or 2.5 percent from 2.8 percent next month.
Low consumer prices are also allowing room for the central bank to cut the key interest rate to stimulate private consumption. Korea’s consumer price index rose 0.2 percent in August from a month ago, raising worries over deflation.
BNP Paribas said the Fed will increase its key rate in December after reviewing economic activity data for a few months.
“We continue to believe that data in the coming months will give the FOMC that little bit more of the confidence needed to raise rates,” the French bank said in a report. “We expect the first hike in December.”