By Choi Kyong-ae
The Bank of Korea faces growing pressure to cut its key rate to support the lackluster economy in the first quarter, with China expanding its monetary easing and the U.S. unlikely to raise rates in March, analysts said Friday.
Analysts said BOK Governor Lee Ju-yeol can ill afford to ignore mounting calls for the central bank to cushion the economy against sluggish domestic consumption, falling exports and other external negatives.
"External monetary moves by other governments, falling exports, low consumer prices and weak consumer sentiment are all cornering the BOK to cut rates as early as March," said KDB Daewoo Securities analyst Yoon Yeo-sam.
The Bank of Japan has recently adopted the rate of negative 0.1 percent which is scheduled to take effect on Feb. 16.
China is sticking to monetary easing to boost its economy and the U.S. is even expected to hold its benchmark interest rate unchanged throughout the year due to its slowing growth, Yoon said.
"The U.S. economic growth is losing steam," he said. "A strong dollar drives down U.S. companies' financial results when they convert their overseas earnings back into dollars. In some cases, low oil prices are forcing U.S. firms to postpone or cancel their investment plans."
This alone could give the BOK good reason to consider cutting its policy rate, analysts said.
Korea's base rate now stands at an all-time low of 1.5 percent following the BOK's four rate cuts since August 2014. But all the efforts to stimulate Asia's fourth-biggest economy resulted in foreign capital outflows and sharply increased household debt as people borrowed more money from banks at cheaper rates.
Foreign net selling on the main Korea Exchange reached a total of 8.028 trillion won from Aug. 1, 2014 to Feb. 4, 2016, according to the Korea Exchange. Household debt jumped 10 percent year-on-year to 1,166 trillion won at the end of September last year, showed BOK data.
The BOK has been reluctant to cut rates, as additional monetary easing would raise record-high household debts further to over 1,200 trillion won. Some of the household debt is also projected to turn into non-performing loans if interest rates rise later this year.
However, analysts said the size of foreign selling in the past two years hasn't reached a level that threatens the stability of Korea's financial market.
"Massive capital outflows aren't likely to happen this year," said LG Economic Research Institute economist Bae Min-keun. "The government's stricter rules on household loans are limiting the pace of household debt growth this year."
Given that the country's economic growth is unlikely to exceed 0.5 percent in the first quarter ending March 31, and that newly appointed Finance Minister Yoo Il-ho recently suggested it is too early to start discussing measures to support growth, the central bank should have room to act first, HSBC Global Research economist Joseph Incalcaterra said.
"The Bank of Japan's move to adopt negative interest rates last week had a discernible impact on the yen, and this is unlikely to go unnoticed by the BOK," he said. "The BOJ's moves may cause Korea's foreign-exchange policy to focus on engineering currency weakness."
Korea's exports marked the worst slump last month in six and a half years due largely to slowing demand from China and other markets. Exports in January plunged 19 percent year-on-year to $36.7 billion, BOK data showed.
"Both the government and the BOK are aiming for less than 3 percent growth but given that exports are plummeting, private consumption alone cannot cover the drop in exports," HSBC Korea Rates Strategist Hong Da-yeon said. "It is increasingly difficult to achieve such high growth for Korea. To be able to encourage firms to invest, the BOK may need lower rates for the coming months."
The Bank of Korea faces growing pressure to cut its key rate to support the lackluster economy in the first quarter, with China expanding its monetary easing and the U.S. unlikely to raise rates in March, analysts said Friday.
Analysts said BOK Governor Lee Ju-yeol can ill afford to ignore mounting calls for the central bank to cushion the economy against sluggish domestic consumption, falling exports and other external negatives.
"External monetary moves by other governments, falling exports, low consumer prices and weak consumer sentiment are all cornering the BOK to cut rates as early as March," said KDB Daewoo Securities analyst Yoon Yeo-sam.
The Bank of Japan has recently adopted the rate of negative 0.1 percent which is scheduled to take effect on Feb. 16.
China is sticking to monetary easing to boost its economy and the U.S. is even expected to hold its benchmark interest rate unchanged throughout the year due to its slowing growth, Yoon said.
"The U.S. economic growth is losing steam," he said. "A strong dollar drives down U.S. companies' financial results when they convert their overseas earnings back into dollars. In some cases, low oil prices are forcing U.S. firms to postpone or cancel their investment plans."
This alone could give the BOK good reason to consider cutting its policy rate, analysts said.
Korea's base rate now stands at an all-time low of 1.5 percent following the BOK's four rate cuts since August 2014. But all the efforts to stimulate Asia's fourth-biggest economy resulted in foreign capital outflows and sharply increased household debt as people borrowed more money from banks at cheaper rates.
Foreign net selling on the main Korea Exchange reached a total of 8.028 trillion won from Aug. 1, 2014 to Feb. 4, 2016, according to the Korea Exchange. Household debt jumped 10 percent year-on-year to 1,166 trillion won at the end of September last year, showed BOK data.
The BOK has been reluctant to cut rates, as additional monetary easing would raise record-high household debts further to over 1,200 trillion won. Some of the household debt is also projected to turn into non-performing loans if interest rates rise later this year.
However, analysts said the size of foreign selling in the past two years hasn't reached a level that threatens the stability of Korea's financial market.
"Massive capital outflows aren't likely to happen this year," said LG Economic Research Institute economist Bae Min-keun. "The government's stricter rules on household loans are limiting the pace of household debt growth this year."
Given that the country's economic growth is unlikely to exceed 0.5 percent in the first quarter ending March 31, and that newly appointed Finance Minister Yoo Il-ho recently suggested it is too early to start discussing measures to support growth, the central bank should have room to act first, HSBC Global Research economist Joseph Incalcaterra said.
"The Bank of Japan's move to adopt negative interest rates last week had a discernible impact on the yen, and this is unlikely to go unnoticed by the BOK," he said. "The BOJ's moves may cause Korea's foreign-exchange policy to focus on engineering currency weakness."
Korea's exports marked the worst slump last month in six and a half years due largely to slowing demand from China and other markets. Exports in January plunged 19 percent year-on-year to $36.7 billion, BOK data showed.
"Both the government and the BOK are aiming for less than 3 percent growth but given that exports are plummeting, private consumption alone cannot cover the drop in exports," HSBC Korea Rates Strategist Hong Da-yeon said. "It is increasingly difficult to achieve such high growth for Korea. To be able to encourage firms to invest, the BOK may need lower rates for the coming months."
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