Foreign IBs split on next rate direction: report

Foreign investment banks showed mixed views on the future direction of South Korea's key interest rate, a report said Thursday, with the country's central bank facing growing pressure on a rate cut.

Earlier this month, the monetary policy committee of the Bank of Korea decided to keep the base rate unchanged at 2.5 percent for a 14th straight month.

The report released by the Korea Center for International Finance showed that BNP Paribas projected the BOK is unlikely to cut the rate as Asia's fourth-largest economy is moving on a modest recovery track despite the central bank's downward growth revisions.

The BOK recently trimmed its growth forecast for the South Korean economy to 3.8 percent for this year and 4 percent in 2015, citing fallouts from the mid-April Sewol ferry disaster that sapped domestic demand and pummeled sentiment. The forecasts are lower than an earlier projection of 4 percent and 4.2 percent.

Credit Suisse, HSBC and JP Morgan said the BOK is likely to lower the rate only after macroeconomic indicators have improved due to jitters that a rate cut can trigger a rise in the country's already heavy household debt.

Barclays Capital, which had initially forecast a rate hike at year-end, said the central bank is likely to delay the move into the first quarter of next year on a slower-than-expected recovery in domestic demand.

In contrast, the report showed that Citigroup, Nomura and Societe Generale forecast a rate cut in August, while Bank of America-Merrill Lynch expected a rate cut within three months.

Citigroup also delayed its projection of a rate hike to the second half of 2015 from the first half.

The BOK is scheduled to hold its next monetary policy committee meeting on Aug. 14.

If the central bank keeps the rate steady at the upcoming meeting, it will mark a 15th straight month of rate freeze. The previous record stands at 16 months between March 2009 and June 2010.

The non-unanimous decision in the July meeting was the first to come in nearly a year, stocking speculation that a rate cut is looming in tandem with the appointment of a pro-growth finance minister.

Finance Minister Choi Kyung-hwan, who doubles as deputy prime minister for economic affairs, has not directly addressed the need for a rate adjustment but his recent remarks have been interpreted as a sign of support for such a move.

In response to a call on a rate cut at the National Assembly, Choi replied, "I can't say exactly what should be done about interest rates, but I believe that my message about the current economy has been sufficiently communicated. Nothing could be more explicitly mentioned (about interest rates) than this." (Yonhap)