By Joori Roh and Cynthia Kim
SEOUL (Reuters) – South Korea’s central bank will likely keep its base rate unchanged on Thursday, even amid easing price pressures and slowing economic growth, a Reuters poll of economists showed.
Bank of Korea Governor Lee Ju-yeol has said the central bank is in no hurry to easy policy, contrary to bond market pricing, which implies a chance its next move could be a cut.
All but one of 17 economists surveyed by Reuters expect no change to the seven-day repurchase rate, now at 1.75 percent.
A slim majority of nine economists anticipate that a rate cut may come between now and 2021, while three still expect the Bank of Korea’s next move to be a rate hike.
Prakash Sakpal, economist at ING, and the only one expecting a cut on Thursday among the 17, said it would be wise for the central bank to ease policies now rather than wait for export weakness to further drag on the economy.
“We anticipate yet another downgrade to the central bank’s growth and inflation forecasts (on Thursday), and if so, it might as well cut the policy interest rate at the same time rather than waiting for the downtrend to intensify further,” Sakpal said in a note.
Markets will focus on the central bank’s quarterly outlook review due at 0430 GMT on Thursday, which economists say are likely to include a downgrade to its growth and inflation forecasts.
The BOK currently sees Asia’s fourth-largest economy expanding 2.6 percent this year, the weakest in seven years, and inflation at 1.4 percent.
South Korea’s trade-reliant economy is facing increasing pressure from sagging exports and a slowdown in China amid the Sino-U.S. trade war. At home, businesses are struggling with rising wages and sluggish consumer sentiment.
The country’s exports contracted for a fourth month in March while headline inflation for the month also slowed to its weakest pace since July 2016.
With these factors in mind, and the U.S. Federal Reserve’s “patient approach” on rates, some analysts are bringing forward their forecasts for a cut at the BOK to this year from 2020.
While only three of 11 economists saw a cut as the BOK’s next policy move through 2020 in Reuters’ February poll, a slim majority of nine of 17 economists now see a cut coming at least once by 2021.
The Fed took a sharply less aggressive policy posture at its March policy meeting, signalling it will not hike rates this year amid a slowing economy and announcing a plan to end its balance sheet reduction programme by September.
South Korea’s three-year bond yields have fallen below the central bank’s benchmark rate of 1.75 percent since then, in a sign that rate-cut bets are building up, and is trading at 1.761 percent on Tuesday, still staying close to levels at which the BOK has in the past been prompted to cut rates.
“We can expect the bank to make a turnaround and boost stimulus as there are clear indications of growth momentum slowing down, and as inflation is weaker than expected,” said Kong Dong-rak, an economist at Daishin Securities, adding that he expects a rate cut in the second half of this year after the planned supplementary budget bill by the government takes off.
Any easing by the BOK would mark a U-turn from its tightening cycle that began at the end of 2017. The BOK last lifted its policy rate in November 2018 amid a focus on containing the country’s property boom.
South Korea’s finance minister said last week the ministry will submit an extra budget of smaller than 7 trillion won ($6.18 billion) to parliament by the end of April.
(Editing by Jacqueline Wong)