BOK likely to make rate cut in first half

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BOK likely to make rate cut in first half

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The Bank of Korea will hold a monetary policy committee meeting on Thursday to decide whether or not to change the key interest rate.

Regarding the recent weakening of the Japanese yen, Bank of Korea Governor Lee Ju-yeol said on Friday, “We’re not doing nothing.” But it is highly unlikely that the central bank will lower the key rate again this month after reducing it by 0.25 percentage point to 2 percent - the lowest ever - last month. That cut followed a previous 0.25 percentage point drop in August.

It’s rare for the BOK to lower the key interest rate twice in just a few months. Since introducing the standard interest rate system in 1999, the only times when the bank decided to lower the interest rate multiple times over a short period was around the 9/11 terrorist attack, in July and September of 2001, and amid the global economic crisis between October 2008 and February 2009.

For this reason, the market is not expecting another cut this month.

“The weak domestic demand after the Sewol sinking is recovering and [we’re] also seeing a weakening won against the dollar, so it’s hard for the Bank of Korea to find a reason to lower the standard interest rate now,” said Hong Jeong-hye, an analyst at Shinyoung Securities.

However, this has not diminished widespread expectations in the market that the BOK will further lower the key rate in the near future. But the question now is when.

“Domestically, gross domestic product growth in the third quarter didn’t reach the expected level,” said Lee Jeong-joon, an analyst at HMC Investment Securities. “And globally, the central banks in Europe and Japan are pumping money into their financial systems, which are feeding the market’s expectation for an additional key interest rate cut.”

On Thursday, European Central Bank (ECB) President Mario Draghi said in a statement, “The governing council is unanimous in its commitment to using additional unconventional instruments” and that “the governing council [is] ensuring the timely preparation of further measures to be implemented, if needed.”

The ECB president’s announcement came after Bank of Japan Governor Haruhiko Kuroda said on Oct. 31 that the bank will expand its monetary base to 80 trillion yen.

The Wall Street Journal reported that “the ECB has moved closer to large-scale buying of government bonds, known as quantitative easing.” The Financial Times wrote that, “[Draghi’s] plan to inject 1 trillion euro” is “to rescue the euro zone economy from stagnation.”

Christine Lagarde, managing director of the International Monetary Fund, applauded the banks’ announcements, calling the plans “perfectly legitimate and appropriate” during a conference of central bankers in Paris on Friday.

As the value of the yen and the euro decline with the expansion of the monetary base, the won is strengthening.

Market observers see the relative rise of the won as the reason why the BOK should further drop the key rate.

But now isn’t the time for the BOK to spring into action. Household debts are increasing along with the low interest rate, and the U.S. Federal Reserve may increase its interest rate next year. And it’s uncertain what effect a lower interest rate from the BOK will bring amid economic changes in Europe, Japan and the United States.

But bond investors are already betting on another round of interest rate cuts.

The yield on three-year treasury bonds, which lingered at about 2.8 percent in June, has dropped since July when the Finance Minister Choi Kyung-hwan took his post, and it has been falling all-time lows in recent weeks.

On Friday, the three-year treasury yield marked 2.09 percent, a drop of more than 0.7 percentage point in the past five months. When the standard interest rate drops 0.5 percentage point and the yield drops more than that, it indicates that the market should expect a further cut in the key interest rate.

Some observers speculate that the key rate drop could happen as early as December, but most are betting on the first half of next year.

“After the Bank of Korea lowers the standard interest rate again in the first quarter next year, the low interest rate period will continue for a long time,” said Kang Seong-bu, a manager of the bond analysis team at Shinhan Investment.

Those who say the BOK’s rate cut could happen this year point to the unexpected monetary decision made by the Bank of Japan.

“In order to guard against the strengthening won from the unexpected stimulus plan from the Bank of Japan and for the sake of the economic recovery, the interest rate cut may happen one or two months earlier than expected” said Kong Dong-rak, an analyst at Hanwha Investment and Securities.


BY CHO HYUN-SUK, LEE HAN-GIL [eunjik@joongang.co.kr]

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