While the Bank of Korea held interest rates at a record low on Thursday, hawkish comments from the governor and a dissenter calling for a rate hike indicate that a change in monetary policy is getting closer.
Governor Lee Ju-yeol, who now has just three rate-setting gatherings left before his term ends in March, said the central bank had raised its economic growth estimate for this year to 3 percent amid a continued global recovery, a solid trend in South Korea and relative stability in financial markets. Government bond prices dropped on the news that board member Lee Il-houng went against the majority, ending more than a year of unanimous decisions.
“Looking at the economy and inflation, conditions seem to be getting ripe to reduce the amount of accommodation, but more importantly, we need time to assess if the trend will continue,” Governor Lee said. He added that recent data on domestic demand points to recovery.
The decision to keep the seven-day repurchase rate at 1.25 percent, unchanged since June 2016, was expected by all 17 economists surveyed by Bloomberg. Despite the reasonable health of the economy and inflation near the BOK’s 2 percent target, uncertainty caused by military tensions with North Korea has so far weighed in favor of a cautious approach.
The yield on three-year government bonds rose 5 basis points to 1.991 percent as of 1:15 p.m. in Seoul. The won weakened 0.3 percent to 1,133.50 per dollar.
“There weren’t many who expected a dissenting vote at this meeting and most had forecast it to be unanimous on hold,” said Seo Hyang-mi, a fixed-income analyst at HI Investment & Securities Co. “I still don’t see a rate increase within this year, but some time in the first half of 2018.”
Yet exports have expanded by double-digits this year, and consumer price gains have been above the BOK’s 2 percent target for the past three months.
The Bank of Korea’s latest outlook forecasts are:
- GDP to expand 3 percent in 2017; from previous estimate of 2.8 percent.
- GDP to expand 2.9 percent in 2018; unchanged from previous estimate.
- CPI to reach 2 percent in 2017; from previous estimate of 1.9 percent.
- CPI to slow to 1.8 percent in 2018; from previous estimate of 1.9 percent.
An earlier Bloomberg survey of analysts on longer-term projections, six out of 22 analysts saw a rate increase by the end of the first quarter, and a majority expected the change by the second quarter or later.
— With assistance by Myungshin Cho, and Shinhye Kang