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Tepid growth report has swung predictions toward a rate freeze
Aug 29,2017
Investor sentiment about the Korean central bank’s interest rate movement is changing again, and this time, it seems to be swaying toward freeze.

In a report released Monday, the Bank of Korea projected that the Korean economy would continue recovering this year, propelled by a supplementary budget passed by the legislature last month, but it maintained its previous view that GDP growth this year would not be able to reach 3 percent as hoped for by the Moon Jae-in government.

The report specifically noted factors like geopolitical tensions from North Korea’s continuous provocations and deteriorating trade relations with China and the United States, South Korea’s two biggest trading partners. Washington is pressuring Seoul to renegotiate their free trade agreement, and Beijing is stifling Korean companies operating in China in apparent retaliation for Seoul’s acquiescence to the installation of an American missile shield on the peninsula.

“While the economy is expected to continue growth in the upper 2 percent, thanks to the recovery of the local and global economies as well as the supplementary budget, the uncertainty of the growth path appears to have increased,” the bank said in its report.

In July, the Bank of Korea projected that GDP would grow 2.8 percent by the end of this year even without a supplementary budget. The outlook was made a week before the 11 trillion won ($9.8 billion) budget passed the National Assembly on July 22.

The less positive view from the central bank has been fueling speculation in the market that the Bank of Korea might postpone raising its key interest rate.

Some analysts are betting that the bank could hold the rate at its current historic low of 1.25 percent until the first quarter next year.

The sentiment appears to be shared in the bond market, where returns on three-year government bonds closed Monday at 1.76 percent, lower than the 1.8 percent range seen earlier this month when investors were speculating about an interest rate hike. Until as recently as a week ago, the market was leaning toward a raise.

The bank’s monetary policy committee has three more meetings this year, including one this week and two more in October and November.

A meeting between the Bank of Korea’s governor, Lee Ju-yeol, and Finance Minister Kim Dong-yeon on Aug. 16, two weeks before the government unveiled a set of measures to cool the real estate market, was interpreted as a possible tendency toward tightening. The Moon government has been trying to curb household debt, which has been seen as a key factor in preventing households from spending more, and higher interest rates could help stem runaway borrowing.

One of Moon’s economic advisers, Kim Hyun-cheol, told reporters recently that the bank needed to raise interest rates, and Lee Mi-seon, an analyst at Hana Financial Investment, shared the sentiment in an Aug. 22 report, noting that the Bank of Korea has traditionally shared the same policy direction as the central government.

“Because most of the government’s micro-policies against household debt have been released, only the Bank of Korea joining the effort is left,” the strategist said in the report.

But with the less optimistic economic projection from the central bank, analysts believe the bank will likely resort to monitoring the global market before deciding on any changes to its rate.

“In the first half, the economy improved vastly from the negative outlook made at the end of last year,” said Kim Sang-hoon, senior analyst at KB Securities. “But recently its momentum has been slightly retarded and the high level of household debt continues to hold back [more aggressive action.]”


BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]