Forecasters see second-half rate cutTop forecasters of Korean interest rates say the central bank will extend a three-month pause as the government dials down pressure to add to October’s easing.
Credit Suisse Group AG, ranked No. 1 for predicting Bank of Korea rate actions over the past two years, said the main rate will stay at a record-low 2 percent on Feb. 17 and drop to 1.75 percent sometime in 2015. Second-ranked Barclays Plc sees no change until June and two increases in the second half as the economy recovers. The median forecast in a survey is for a cut to 1.75 percent by March.
While the BOK is independent, its decision to lower the benchmark rate to a level last seen at the height of the 2008 global financial crisis came under pressure from Finance Minister Choi Kyung- hwan. Choi now has shifted focus to changing labor, finance and education policies to ensure long-term growth. That drove an increase in the three-year sovereign bond yield, which dropped below the central bank’s benchmark rate in late January.
“The BOK is receiving less government pressure to cut than before,” Wai Ho Leong, Singapore-based senior regional economist at Barclays, said by e-mail. “If rates at 2 percent cannot lift sentiment after repeated attempts, then it tells you the problem is more deep-seated and structural.”
The three-year yield sank to a record 1.94 percent Feb. 3. on speculation the BOK would join a wave of monetary easing by more than a dozen central banks this year. It has climbed 14 basis points, or 0.14 percentage point, since then to 2.08 percent as of Thursday in Seoul, Korea Exchange prices show. Choi was reported as saying this week that structural reforms are more important than focusing on interest rates.
“The bond market was overly biased toward buying in hopes of a rate cut and was overstretched,” said Kong Dong-rak, a Seoul-based fixed-income analyst at Hanwha Investment & Securities Co. “The three-year yield can correct to as high as 2.1 percent. There are expectations for one more rate cut, but that won’t happen in February, probably in March.”
The first time the monetary authority cut the benchmark rate to 2 percent was in February 2009. It maintained that level for 16 months to fight the fallout from the global financial crisis. The BOK raised the rate to 3.25 percent over two years from July 2010, and the current cycle of easing began in July 2012.
Gov. Lee Ju-yeol, who cut the rate by a quarter point in both August and October, said Jan. 22 the central bank is still monitoring the impact of those reductions and its forecast for 3.4 percent growth in 2015 is in line with the economy’s potential rate of expansion. While structural reforms may cause a temporary slowdown, they help remove inefficiencies and support growth in the medium to long term, he said.
While the BOK cut its 2015 growth estimate from 3.9 percent on Jan. 15, the Finance Ministry has stuck with its December projection of 3.8 percent. Inflation was at 0.8 percent in December and January, the lowest level since 1999, and the central bank forecasts a 1.9 percent increase in consumer prices this year.
Gross domestic product increased 0.4 percent in the three months through December from the previous quarter, the least since the third quarter of 2012, official data show. Asia’s fourth-largest economy grew 3.3 percent in 2014.
“Although growth remains weak and inflation is falling, the BOK remains cautious in lowering the policy rate at this juncture as it doubts its effectiveness in bolstering growth,” Christiaan Tuntono, Hong Kong-based analyst at Credit Suisse said by e-mail. “We still expect the central bank to make one rate cut this year if the momentum on growth and inflation stays sluggish, in compliment with the government’s structural reform effort.”
Lee said on Jan. 15 the current interest rate is “not insufficient to support growth” and the central bank will set future inflation targets soon. He has indicated that with low price gains linked to supply factors such as the plunge in oil, it isn’t desirable to manage monetary policy just to match inflation goals.
The central bank’s reluctance to cut borrowing costs also stems from concern about Korea’s record household debt, which rose for 11 straight months through December. Borrowing, excluding mortgages, swelled to an unprecedented 519.1 trillion won ($473 billion) at the end of 2014 amid low interest rates, and the BOK’s policy-setting committee said on Jan. 15 it will closely monitor “the trends of household debt” along with capital flows and external risks.
While Credit Suisse hasn’t specified a time frame for when it expects the benchmark rate to be cut to 1.75 percent, Barclays forecasts an increase to 2.25 percent in the third quarter and to 2.5 percent in the fourth. Citigroup Inc., which earlier predicted a reduction, now forecasts no change in borrowing costs this year.
“Concern on household debt is huge,” Chang Jae-chul, chief Korea economist at Citigroup in Seoul said by phone on Feb. 10. “The BOK forecast shows growth will pick up and be close to potential. They think the current benchmark rate is sufficient to support economic growth or recovery.”