Experts bank on interest rate cut

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Experts bank on interest rate cut

The expectation of a cut in the interest rate is growing ahead of the Bank of Korea’s (BOK) meeting on Friday, on the back of disappointing economic data and a reduction in bond yields which indicate more market players are betting on a rate cut.

“There is a possibility of a rate cut by the Bank of Korea at the upcoming meeting,” said Park Hyeong-joong, an analyst at Daishin Securities, who added that even if the reduction does not take place this month, “it was likely within this year.”

Market experts say last week’s disappointing export data and the government’s interest in lifting Asia’s fourth-largest economy and its exports could prompt the central bank to cut the borrowing costs further from the current record-low of 1.5 percent.

The Ministry of Trade, Industry and Energy showed Korea’s August exports fell at the fastest rate since the global financial crisis, down 14.7 percent year-on-year. Finance Minister Choi Kyung-hwan commented during the same week the government was lowering next year’s growth outlook to 3.3 percent from 3.5 percent.

Generally, a lower interest rate tends to spur weakness in the country’s currency, which in turn helps the country’s exports. The won is currently Asia’s second-biggest loser this quarter and fell on Monday beyond 1,200 per dollar for the first time in five years.

An unusual closed-door meeting of BOK governor Lee Ju-yeol and Finance Minister Choi late last month also fanned rate cut expectations. A similar meeting in July last year was followed by a rate cut.

Money market participants appear to be already factoring in the possibility of a rate cut. The three-year bond yield dropped to a record-low 1.64 percent on Friday, down from 1.73 percent earlier this month and just 14 basis points higher than the central bank’s benchmark rate.

Indeed, Australia & New Zealand Banking Group recently predicted a September interest rate cut in Korea, shifting from its previous stance that no reduction would be seen this year. BNP Paribas also expected an easing at Friday’s meeting, while Barclays, HSBC and Morgan Stanley are forecasting a fourth-quarter cut.

However there is one factor that may keep the BOK in check - fast growing household debts, which the central bank has traditionally treated with caution.

“If the BOK loses rate cut timing in the interest of discouraging household debt, it may cause even more deterioration of the … financial sector and households,” Park said.

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