BOK to weigh timing of rate cut

In light of weak economic data, sketchy corporate restructuring plans at home and fluctuating expectations on U.S. rate hikes, the Bank of Korea’s monetary policymakers will meet Thursday to review borrowing costs.

Korea’s seven-day repurchase rate is at a record-low of 1.5 percent for the 11th month running, but minutes of the BOK’s latest rate-setting session in May showed that one board member called for a rate cut in the near-term.

For the month of June, experts see the monetary policy board weighing between a cut now or “signal now and cut later,” with more betting on the latter. 

“The BOK is unlikely to move the rate, ahead of key global events that could turn up market volatility,” said Lee Mi-sun of Hana Financial Group in Seoul in a note. 

“A rate cut may be in store for July or later, after the BOK officials check for themselves how events like the U.S. Federal Open Market Committee’s June meeting and the U.K. referendum on Brexit unfold,” the analyst said.

The FOMC’s decision on U.S. fund rates is expected to be out on June 15 in the U.S., which will lead right into a two-day monetary policy meeting in Japan from June 15-16. On June 23, Britons will go to the polls to decide whether Britain should stay or leave the European Union.

Any prospect of a change in U.S. interest rates is a key variable for Korea’s monetary policymaking, as it could affect the direction of global funds. A rise in U.S., after Korea slashes its own to a new historic low, is feared to spark an exodus of foreign capital from Korea.

On the domestic front, a rate cut may be justified as a preemptive palliative to soften the impact of corporate restructuring, particularly since recent economic data has pointed to a continued sharp contraction in trade and a dip in production, said HSBC’s Frederic Neumann and Joseph Incalcaterra in a note from Hong Kong last week.

“Weak data, dovish minutes from May and the impending impact of financial restructuring suggests a rate cut is coming soon,” said the economists. “But tactically, BOK officials may prefer to wait for a month or so,” they said, pushing back their call for a 25 basis point cut from the current quarter to the next. 

The BOK, along with the Finance Ministry and the Financial Services Commission, is drawing up measures to support corporate restructuring which center on the recapitalization of two state policy banks.

The methods through which the BOK should provide liquidity to the banks are under discussion and expected to be finalized by the end of June.

By Lee Sun-young (milaya@heraldcorp.com)