BOK may revise outlook

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BOK may revise outlook

Since the Korean central bank’s monetary policy meeting on Thursday, there is a growing consensus that it will lower its economic outlook for the nation in an announcement next month.

Most market experts say it seems that Governor Lee Ju-yeol has lost some confidence in the economy and has taken a step back from his hawkish stance during the monthly monetary meeting last week.

On Thursday the central bank’s monetary policy committee unanimously voted to freeze the key interest rate for the 13th consecutive month, the longest since a 16-month period starting in March 2009 when the rate was frozen at 2 percent.

“The monetary policy committee seems to have taken a more cautious stance compared to the previous month,” said Kim Jina, an IBK Securities fixed-income analyst. “It was noticeable that Governor Lee, instead of expressing an optimistic view of the economy as he did before, took a more reserved approach.”

When asked about the Bank of Korea’s statement that the economic recovery hesitated due to the slight contraction of consumer spending as a result of the Sewol tragedy, the governor did not give a direct answer. Instead, he defensively said that more studies must be done to determine if the weakening of the domestic market will be long-term.

He also hinted that his monetary policy direction could change since a possible interest rate raise is based on an April forecast that the Korean economy would surpass its potential growth and post a 4 percent expansion this year and 4.2 percent expansion next year.

This indicates that the central bank already sees the contraction in the domestic economy as severe enough to lower the economic growth outlook.

Domestic institutes have already lowered their outlook due to the economic impact of the Sewol tragedy.

The state-run think tank Korea Development Institute has lowered its outlook for the year from 3.9 percent to 3.7 percent and the Korea Economic Research Institute dropped its outlook from 3.5 percent to 3.4 percent.

Market experts say that due to the slow domestic recovery and the appreciation of the Korean won against the dollar, the market interest rate drop will likely continue.

Bond yields have been retreating since Thursday, reflecting the growing consensus that the central bank will backtrack on its economic outlook.

The yield on a three-year treasury fell from 2.8 percent on Thursday to 2.7 percent yesterday.

The situation was the same for five year bonds, which declined from nearly 3.5 percent to below 3 percent.

The yield on a 10-year bond fell from 3.4 percent to 3.3 percent.

The IBK Securities analyst said that although the central bank will likely lower its outlook, it is unlikely that Governor Lee will lower the key interest rate.

“It is hard to deny that the central bank has stepped back from its earlier hawkish stance,” said Kim of IBK Securities. “The slow recovery could postpone normalization of the monetary policy but the bank lacks evidence that it is a crisis that demands an aggressive loose monetary policy.

“Although the BOK has raised concerns over the weakening domestic market, it still believes the current interest rate level could support the overall economic recovery.”


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