BOK highly likely to raise key rate today

By Lee Kyung-min

The Bank of Korea (BOK) is highly likely to raise its key rate today at the last monetary policy meeting in 2018, according to market analysts and investors, Thursday.

This will be the first rate hike in a year since it increased the benchmark rate to 1.5 percent in November 2017.

Bank of Korea Governor Lee Ju-yeol/ Korea Times photo by Hong In-ki

A seven-member policy board chaired by BOK Governor Lee Ju-yeol will determine whether to up the rate 25 basis points to 1.75 percent, which will narrow the rate gap between Korea and the U.S. to 0.5 percentage points.

The hike has long been expected following numerous “signals” given by the BOK over the past few weeks amid volatile financial markets and soaring household debt.

According to a survey conducted by the Korea Financial Investment Association of 200 workers at 106 securities services firms between Nov. 16 and 21, 79 percent said they expect a hike.

Only 21 percent said the rate will be left unchanged.

Experts say a rate hike is almost a foregone conclusion given the central bank's repeated announcement and its priority on “financial stability.”

The central bank's focus has been shifting to financial stability after foreign investors began dumping Korean shares over the past month, stoking fears of a massive capital flight if the rate gap further widens.

“Of the seven members, the minority opinion for the rate hike already increased to two in October's policy meeting,” said Kim Sang-hoon, a chief analyst at KB Securities.

“According to the minutes of the board meeting disclosed recently, two more members are of the same opinion, making them the majority now. The rate will go up,” he added.

The central bank has thus far indicated that financial market stability will be the top determinant in the rate decision, despite the weak jobs data and low inflationary pressure as of late, he added.

“The BOK's view that the current gross domestic product (GDP) growth rate is well within the earlier projected range also reinforces the rate hike sentiment,” he said.

The BOK revised down its growth projection to 2.7 percent for 2018 and 2019 citing sluggish consumption and rising unemployment.

In August 2017, the BOK said the country's potential growth rate will be between 2.8 percent and 2.9 percent between 2016 and 2020.

Soaring household debt, now reaching 1,514 trillion won ($1.3 trillion), is another factor giving the BOK a reason to raise borrowing costs, another analyst said.

“Household debt has risen faster than income growth, which means many people are taking out loans on a relatively low interest rate to buy homes to make money. This leads to soaring apartment prices. If the borrowing cost increases, the market bubble may burst,” said Kong Dong-rak, a fixed income strategist at Daishin Securities.

Given the economy will continue to be mired in weaker, jobless growth further in 2019, today's meeting will be the last opportunity for the central bank to raise the rate, he added.

The BOK has limited options but to raise the rate, or face heated criticism for weakening the trust in the financial market, according to Sung Tae-yoon, an economist at Yonsei University.

“The current market condition is far from conducive to a rate hike, but the BOK will have to follow through on its earlier signals. If not, the market will have less confidence in the central bank's moves.”

Meanwhile, attention is growing as to whether the BOK will be affected by “dovish” comments from U.S. Fed Chairman Jerome Powell a day earlier.

“Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy ― that is, neither speeding up nor slowing down growth,” Powell told The Economic Club of New York in a speech, Wednesday (local time).

The change is notable from his earlier stance just less than two months ago, when he said the Fed was a “long way from ceasing the current upwards adjustment,” indicating Fed rate hikes will continue.