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key rate-March outlook

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(Globalpost/GlobalPost)

SEOUL, March 12 (Yonhap) -- South Korea's central bank is expected to freeze the key interest rate for the fifth straight month in March as it is set to gauge the new government's stimulus steps, a poll showed Tuesday.

Sixteen out of 25 analysts predicted that the Bank of Korea (BOK) will likely leave the benchmark seven-day repo rate unchanged at 2.75 percent on Thursday, according to the survey by Yonhap Infomax, the financial news arm of Yonhap News Agency. Nine others forecast a rate cut for March.

But even if the key rate is frozen at the March meeting, more analysts argue that the BOK is likely to cut the key rate in April, by which time the government is expected to have unveiled an economic stimulus package.

"Recently, economic conditions at home and abroad have not changed much from last month. A chance for a policy-coordinated rate cut seems to be low as the makeup of the government reorganization is being delayed," said Park Jong-yeon, an analyst at Woori Investment & Securities.

A batch of economic data at home and abroad are sending mixed signals about the economic recovery, but expectations are growing that the global economy would turn better in the second half.

The country's industrial output shrank for the first time in five months in January while its exports declined for a second time in three months in February.

The yen's weakness, driven by Japan's powerful monetary easing, and concerns over U.S. fiscal cuts would serve as downside risks to the Korean economy, which grew 0.4 percent in the fourth quarter from three months ago, analysts say.

But the February meeting minutes showed that most BOK policymakers presented a slightly better outlook for the Korean economy, although the modest recovery is anticipated down the road.

Despite some signs of improvement in the local economy, more analysts are still betting on a rate cut this year, saying that the BOK will likely move after gauging the depth of the government's stimulus package.

President Park Geun-hye took office on Feb. 25 with key campaign pledges to support smaller firms and debt-ridden households.

But the government's economic policy direction has yet to be unveiled as the bill on government reorganization is still pending in parliament amid intra-party struggles, delaying confirmation of finance minister nominee Hyun Oh-seok.

Hyun said on Monday that downside risks to the economy are deemed large, opening the door for creating supplementary budgets.

BOK Gov. Kim Choong-soo earlier said that when monetary and fiscal policies are coordinated, the effect of the policy mix would increase. That comment has spawned market speculation that a rate cut may come on the heels of government stimulus measures.

The return on the three-year government bonds hit a record low of 2.63 percent as of end-February, driven by foreigners' bond buying.

"The yen's weakness somewhat eased recently, but export momentum remained weak. The local economy has moved in sideways since the second half of last year," said Lee Sung-kwon, a senior economist at Shinhan Investment Corp.

But a few analysts said that the central bank is likely to leave the key rate unchanged throughout this year as the Korean economy would perform better in the second half.

"Signs of the economic recovery are spotted and bond market players' rate cut bets are seen as excessive," said Kong Dong-rak, a fixed-income analyst at Hanwha Investment & Securities Co.

"The rate freeze is anticipated, given that more BOK policymakers view the current policy stance as being already accommodative."

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http://www.globalpost.com/dispatch/taxonomy/term/39093/130312/key-rate-march-outlook