BOK likely to keep key rate

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BOK likely to keep key rate

Expectations are growing that the central bank could lower its benchmark rate during a meeting scheduled for Thursday due to recent moves by other economies to emphasize growth.

“The European Central Bank’s lowering of its benchmark rate for the first time in 10 months seems to influence financial market participants psychologically, especially the bond market participants. Momentum seems to be shifting rapidly toward betting on lowering the monetary rate,” said Jeong Yong-taek, a KTB Investment & Securities economist.

Last week the ECB lowered its interest rate to a new record low from 0.75 percent to 0.5 percent for the first time in 10 months to pep up the stagnant European market. India also lowered its benchmark rate last week by 0.25 percentage points to 7.25 percent. India has been lowering its benchmark rate since the beginning of the year in a pro-growth campaign. This is a stark contrast to the Korean central bank that has kept the key interest rate at 2.75 percent for six consecutive months.

But despite the changing momentum, the big obstacle to a rate cut remains: Bank of Korea Gov. Kim Choong-soo. He has the final say on any changes even if they are approved by half of the six members on the monetary police committee.

He said during the weekend at the Asia Development Bank meeting in New Delhi that he has no intention of approving a rate cut. He insisted that it is now the central government’s turn to stimulate the economy through fiscal policies and has maintained that the central bank has already taken preemptive steps to boost the economy by lowering the key rate in July and October.

On the other hand, the Park Geun-hye administration has been pressuring the central bank to contribute to its pro-growth strategy.

Market experts say the central bank has room to lower its benchmark borrowing rate as inflationary pressure is low.

But government policies mean that Kim has even less incentive to lower the rate. “The government’s new fiscal stimulus equal to 1.3 percent of GDP and measures to lift the housing market relieve pressure on the BOK to lower rates,” a Moody’s report released yesterday said. “Rate hikes will come in view as the output gap starts closing, which appears unlikely before mid-2014, suggesting a long period of steady rates ahead.”

June Park, a Meritz Securities analyst, said as long as Kim has the deciding vote, a change in monetary policy rate is unlikely.

“There are growing expectations that the central bank may lower the interest rate this month due to recent events including the recent European Central Bank’s decision to lower its rates as well as the BOK’s monetary policy committee meeting last month where half of the six members did not agree to the freezing of interest rates,” Park said.

“However, it is unlikely that the central bank will lower the benchmark rate as Governor Kim, who holds the deciding vote, decided to freeze the interest rate last month and has said he will wait until the influence of the lowered interest rates from last year is confirmed.”

By Lee Ho-jeong []
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