July policy meeting fans speculation of rate cut in Aug.

By Lee Minji

SEOUL, July 14 (Yonhap) -- A split decision to freeze the base rate in July is lending support to speculations that the central bank will cut the rate next month after holding it steady for 14 straight months, analysts said.

On Thursday, the Bank of Korea (BOK)'s seven-member monetary policy committee voted to keep the key rate at 2.5 percent for July, with one unknown member dissenting. The details of the monthly meeting will be unveiled in minutes set for release later this month.

While the rate freeze was largely in line with market consensus, the minority opposition, the first to come in nearly one year, spurred views that the BOK may lower the rate as early as in August as incoming finance minister Choi Kyung-hwan readies to unleash stimulus measures.

In his confirmation hearing, the former ruling party lawmaker and economic minister said he will "employ every possible tool" to prop up the local economy, a possible indication that the pro-growth official would pressure the independent central bank to take part in policy coordination.

The BOK's revised economic outlook, which was also announced on Thursday, further stoked speculation that a rate review is imminent. In its latest revision, the central bank cut its growth forecast for Asia's fourth-largest to 3.8 percent from 4 percent, citing fallouts from the mid-April Sewol ferry disaster that sapped domestic demand and hurt consumer sentiment.

"The BOK governor's remark from last week that stressed heightened downside risk signaled a rate cut for August," said Kyobo Securities Co. fixed income analyst Kwon Han-wook, who was the sole respondent among the 22 analysts polled by Yonhap Infomax to forecast a rate cut for July.

Kwon said given the central bank's renewed recognition of downside risks and heightened need to harmonize fiscal and monetary policy, the central bank is likely to first cut the rate in August and further cut the rate to 2 percent in the fourth quarter.

Some analysts agreed that a rate cut is likely in August but warned of the potential risks stemming from the move.

"We see a high likelihood of a rate cut in August. In our view, lower rates should boost jeonse prices and increase household debt, which could reduce private consumption," said Nomura economist Kwon Young-sun. Jeonse refers to home rentals in which tenants pay a large lump sum as a deposit in place of monthly rent.

Kwon, who had initially forecast the central bank to stand pat until December to hike the rate, warned that "the marginal benefits of rate hikes are outweighed by their marginal costs."

Some analysts forecast the BOK to hold the current base rate until the end of the year as the government relies on other measures to energize the economy.

Kiwoom Securities Co. fixed income strategist Kim Min-kyu said while rate cut speculations linger, the central bank will likely freeze the rate because a cut in the rate cannot boost falls in domestic demand that stem from structural issues.

"We remain of the view that rate cuts are the least preferred option for the BOK at this stage, particularly with the government sounding increasing likely to announce a supplementary budget," Mark Walton of BNP Paribas said.

In an earlier poll by Yonhap Infomax, one analyst forecast the key rate to stand at 2 percent at year-end, while one forecast the rate to reach 2.25 percent. Two analysts projected the rate to reach 2.75 percent, while 17 others expected a rate freeze at 2.5 percent.

<All rights reserved by Yonhap News Agency>