Korea's policy rate seen on hold for 1.5%

BOK Governor Lee Ju-yeol responds to a question in a recent meeting with local reporters held in the bank's headquarters, downtown Seoul, in this file photo. Korea Times file

By Kim Yoo-chul

The Bank of Korea (BOK) is expected to leave its key policy rate unchanged at its monetary May 24 policy meeting, according to economists and research firms, Tuesday.

Ninety-three percent of bond market participants expect the central bank to keep its seven-day repurchase rate unchanged at 1.5 percent, according to a survey by the Korea Financial Investment Association.

Exports are being sustained smoothly, although trade friction between the United States and China is a wild card to watch, analysts said, while noting a consumer recovery is improving gradually.

However, a drop in industrial output and factory operation rates are two factors worrying the BOK, as an additional rate hike could affect sentiment among large-cap manufacturers.

Data from Statistics Korea show industrial output decreased 1.2 percent in March from a month earlier, the largest drop in 26 months. The average factory operation rate also dropped 1.8 percentage points to 70.3 percent, the lowest level since March 2009.

“Sagging job data could be another factor for the BOK not increasing its benchmark rate. The bank will leave its policy rate unchanged at 1.5 percent in May,” Samsung Securities analyst Huh Tae-oh said, adding expectations for a July rate hike have also disappeared.

Slow improvements in employment and wage growth are symptoms of the challenge facing productivity; improving medium-term productivity is what is required.

In April, 26.86 million were employed; an addition of 123,000 year-on-year, which was below earlier market consensus. The unemployment rate remained at 4.1 percent.

“There is still no broad-based recovery in employment conditions. Moreover, whilst the household-debt-to-GDP ratio has slowed its increase, the household balance sheet has still not been addressed,” said Kim Ji-na with IBK Securities.

Such thoughts were in accordance with recent remarks by BOK Governor Lee Ju-yeol: “Uncertainties are still high because of the ongoing trade friction between the United States and China. The BOK was also worrying over symptoms of financial instability in some emerging markets, while the bank has to keep an eye on the domestic job market.”

Lee said the bank would manage its monetary policy stance not to undermine growth or weaken consumption.

The financial market had expected the BOK to raise its rate in July after giving such a signal at its May meeting. New BOK monetary policy member Lim Ji-won, a former economist with JP Morgan, weighed in on the possibility of raising rates then.

“Inflation is still under control within the bank's earlier target, but this is one of many factors. Given the weak job data and low facility investment by large manufacturers, the BOK isn't ruling out the possibility that consumption may slow in the second half. We have to await new updates for the BOK's adjusted accommodative monetary policy,” Kim said.

Unless the policy rate differential between Korea and the United States is as wide as 100 basis points, economists say major capital outflow is unlikely.

“The BOK is expected to use the outcomes of an upcoming summit between the United States and North Korea and rate increases by the Federal Reserve as its key rationale before increasing its rate, which I think will come in August,” said Kong Dong-rak, an economist at Daishin Securities, adding Korea's sizable current account surplus means its monetary policy stance does not need to be in tandem with that of the United States.