Bank of Korea Expected to Stand Pat as Trade Tensions Ease

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(Bloomberg) —

South Korea’s central bank is expected to stand pat at this year’s first rate decision on Friday as it pins hopes on a turnaround in exports and increased fiscal spending to support growth.

Optimism is growing that the worst may be over for the export-dependent economy as overseas shipments fall less and global trade tensions subside. While the Bank of Korea has limited policy room after two rate cuts last year, the government has pledged to front load its record budget to fuel recovery.

© Bloomberg Inflation is edging up while exports are falling less than expected

All but one of 22 economists surveyed by Bloomberg forecast the BOK will maintain its benchmark interest rate at 1.25% this week. One analyst predicted a 25 basis point reduction.

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“The pressure for the BOK to cut rates to support growth has been reduced somewhat,” said Ma Tieying, an economist with DBS Bank. She pointed to the China-US phase-one trade deal, bottoming out of the electronics cycle and increased fiscal spending as reasons.

The BOK estimates South Korea’s economy grew 2% last year and sees it expanding 2.3% in 2020. Projections from private sector economists are 0.1 percentage point less for both years.

Further supporting calls for a rate hold is the government’s determination to curb overheating in the property market. President Moon Jae-in on Tuesday pledged to stabilize home prices, attributing the gains to low interest rates and excess liquidity.

How Governor Lee perceives the risks from low rates will be a key focus at the post-decision press conference, with any increased emphasis likely to tamp down easing bets down the road. Record household debt, and the risk that it will continue to accumulate, is an area Lee may highlight. Pulling the other way, any dissent from board members citing growth and inflation concerns will keep rate-cut speculation alive.

The BOK is expected to announce its decision around 10 a.m. Friday in Seoul, followed by a statement assessing the economy and inflation. Lee holds a press conference at around 11:20 a.m.

2020 Outlook

For the rest of 2020, economists are divided on BOK projections between a hold at 1.25% and one rate cut.

The BOK said in its statement on 2020 policy last month that it would keep an accommodative stance to boost inflation, which came in at record low 0.4% in 2019. The bank also announced it would bolster the study of monetary policy tools other than interest rates.

While the BOK expects inflation to accelerate this year, it also sees structural forces such as an aging population threatening efforts to boost prices.

Friday’s decision will be one of three rate reviews the BOK will hold this year under the current board. Four members will leave in April, and another in August, with President Moon holding the key to appointments. The balance between dovish and hawkish members in the newly composed board may affect the BOK’s policy path.

To contact the reporter on this story: Sam Kim in Seoul at skim609@bloomberg.net

To contact the editors responsible for this story: Paul Jackson at pjackson53@bloomberg.net, Jiyeun Lee, Jason Clenfield

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