Foreign IBs say BOK's next move is rate cut

Major foreign investment banks expect the South Korean central bank to cut the key interest rate in March or April to support the country's economic growth, a report showed Tuesday.

In a split decision, the Bank of Korea (BOK) froze the benchmark 7-day repo rate at 2.75 percent for the fourth straight month last Thursday on signs of the global economic recovery although a stronger won and geopolitical risks pose threats to the Korean economy.

More than five foreign investment banks said that the BOK's next move would be a rate cut as the South Korean economy would underperform its long-term potential growth this year and inflation pressure remains benign, according to the report by the Korea Center for International Finance.

They said that the BOK is likely to lend support to the incoming government's efforts to stimulate the economy, which grew at a 3-year low of 2 percent last year. The BOK's 2013 growth estimate stands at 2.8 percent.

President-elect Park Geun-hye will take office on Monday with key campaign pledges that include active government support for smaller firms and debt-stricken households.

BoA-Merrill Lynch forecast the central bank to slash the rate in April and then freeze it until the end of this year, although it did not exclude a chance of a rate cut in March if economic data turn worse, the report showed.

BNP Paribas and Royal Bank of Scotland said a rate cut is anticipated in March, right after the incoming government will set sail, based on Park's vows to tackle household debt problems.

Analysts from local brokerage houses said that Park's choice of the deputy prime minister in charge of economic affairs may cement the view that the BOK will reduce the borrowing costs.

She nominated Hyun Oh-seok, the chief of the state-run Korean Development Institute (KDI), as the deputy prime minister for economic affairs, which heads the finance ministry, on Sunday. In its latest policy suggestion, the KDI argued for the need to stress expansionary fiscal spending and a rate cut.

Following the February rate session, expectations for a rate cut somewhat receded in the market after BOK Gov. Kim Choong-soo said the current policy stance is already seen as accommodative.

But market players are still betting there will be a rate reduction in the first half.

Reflecting market players' division over the BOK's rate policy, the report said that several IBs, including Barclays and Nomura, forecast a rate freeze throughout this year, citing improving economic activity. (Yonhap News)