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The Bank of Korea Gov. Kim Choong-soo (Ahn Hoon/The Korea Herald) |
Analysts are divided over whether South Korea's central bank will cut the key interest rate for May, but more experts are betting on a rate freeze, citing prospects for the economic recovery, a poll showed Tuesday.
Out of 23 analysts, 12 experts predicted that the Bank of Korea (BOK) will freeze the benchmark seven-day repo rate at 2.75 percent for the seventh straight month on Thursday, according to a survey by Yonhap Infomax, the financial news arm of Yonhap News Agency.
The remaining 11 analysts argued for a rate cut for May, saying that economic uncertainty is still rampant, raising the need for the central bank to take actions in line with the government's stimulus drive.
The tight division came as the April meeting minutes showed that BOK board members froze the key rate in a 4-3 vote with BOK Gov. Kim Choong-soo casting the final vote to stand pat on the rate.
Analysts betting on a rate freeze said that an additional rate cut would have little impact on shoring up growth as liquidity is already ample, necessitating preserving policy room for a rainy day.
"The recovery pace is not strong, but the economy is likely to better perform later this year," said Yoon Yeo-sam, a fixed-income analyst at KDB Daewoo Securities Co.
"Given that board members shared the view that a rate cut is seen as being limited in boosting growth, the BOK is likely to stand pat on the rate throughout this year."
The May meeting comes amid growing tension between the government and the central bank over the necessity of a rate cut as they are at odds over assessing the growth trajectory.
The BOK resisted government pressure to lower the borrowing costs in April, saying that monetary and fiscal policies are moving in the same direction as each policy takes a different amount of time to generate intended impacts.
The South Korean economy grew 0.9 percent in the first quarter from three months earlier, the fastest growth in two years, easing pressure on a rate cut, experts said.
The BOK recently revised down its 2013 growth estimate to 2.6 percent from 2.8 percent, but the bank said that the growth projection remains intact, adding that Asia's fourth-largest economy will perform better in the second half.
The government sharply lowered its growth projection to 2.3 percent for this year and proposed an extra budget worth 17.3 trillion won ($15.8 billion) to spur growth.
In an apparent bid to counter pressure to cut the rate, Gov. Kim said on Friday that now is the time for the government to take actions to spur growth as the BOK has already adopted a monetary easing stance by cutting the key rate twice last year.
In a separate poll, four out of six foreign investment banks including Barclays and HSBC forecast that the BOK is likely to leave the rate steady in the second quarter.
But analysts predicting a rate cut said that still high economic uncertainty and concerns about a low-growth trend warrant the need to lend support to the government's efforts to bolster growth.
"Concerns about the global recovery began to intensify in the second quarter as major economies like the U.S. and Europe have been rushing to keep or expand the easing stance," said Kwon Han-wook, an analyst at Kyobo Securities Co.
They said that the BOK will likely lower the borrowing costs as part of global policy coordination as its counterparts in the eurozone and India recently cut the benchmark rates to spur growth.
The European Central Bank (ECB) lowered the policy rate to 0.5 percent last week as the economy in the eurozone is still in a deep downturn. The head of the ECB said the bank is ready to cut the rate again if necessary.
On its home turf, South Korea's industrial output shrank for the third straight month in March and exports only eked out a 0.4 percent on-year gain in April amid the yen's weakening trend.
Nagging concerns about the eurozone debt crisis and the yen's weakness have been picked by the BOK as the main downside risks to growth. Gov. Kim earlier said that as the yen's slide is likely to persist for a long time, its negative impacts on Seoul's exports are likely to be visible down the road.
The poll showed that more market watchers forecast the BOK would eventually lower the policy rate, likely by 0.25 percentage point, within this year.
But foreign investment banks said that the BOK may begin to hike the key rate as early as the fourth quarter as the South Korean economy is expected to recover. (Yonhap News)
