South Korea’s central bank seen keeping rates on hold but case for easing grows: Reuters poll

May 29, 2019

By Joori Roh and Cynthia Kim

SEOUL (Reuters) – South Korea’s central bank is expected to keep monetary policy unchanged this week, a Reuters poll showed, although pressure is growing to cut interest rates as the ongoing U.S.-China trade dispute hits global demand for the country’s exports.

At the same time, the Bank of Korea is likely to be cautious about cutting rates too soon, given such a move would knock the won lower, creating capital flight risks.

All but one of 21 economists surveyed by Reuters predicted the Bank of Korea (BOK) would leave the seven-day repurchase rate unchanged at 1.75% at its meeting on Friday.

Fifteen of the 21 respondents see a rate cut coming between now and 2020, while three forecast the bank to stand pat through 2020.

ING economist Robert Carnell, one respondent expecting a rate cut this week, said cutting rates early, rather than late will help speed up the return to recovery.

“We believe the poor trade environment and ongoing tech slump will continue to depress Korea’s growth, making it difficult for the central bank to defy easing,” ING said in a note.

South Korea’s economy unexpectedly contracted in the first quarter, hurt by a slump in exports and chip sector, while headline inflation remained near zero percent, adding to signs that the trade war and slowing global demand are hurting economic activity.

Eleven out of the 21 economists surveyed said there will be at least one dissenter to Friday’s rate decision who would call for a cut. Past experience shows the bank tends to cut rates within a few months of a dissenting vote.

Oh Chang-sob, an economist at Korea Investment & Securities, said a weakening won is a factor that could delay any easing, as policymakers would also focus on preventing any major capital outflow amid trade headwinds.

“Although growth contraction is a concern, the BOK will stay on hold on Friday due to the pressure on the won,” Oh said, who sees a cut in the first half next year.

A separate Reuters poll showed the country’s May exports likely contracted 5.6% in year-on-year terms, extending a downturn seen since December. Exports fell 2% year-on-year in April. Imports are expected to have inched up by a median 0.4%, slowing from the 2.6% increase in the previous month.

For the first 20 days in May, South Korean exports tumbled 11.7% from a year earlier, with chip sector shipments falling by 22%. By destination, exports to China and the United States dropped 15.9% and 4.4%, respectively.

Economists forecast headline inflation for May at 0.8% on year in May, the same survey showed, up from April but still far below the central bank’s 2% target and the BOK’s annual-term forecast of 1.1%.

Industrial output is expected to have risen 0.5% in April, slower than the previous month’s sharp 1.4% rise.

Trade data is scheduled to be published at 0000 GMT onSaturday, while the inflation figures are expected at 2300 GMTon June 3.

(Reporting by Joori Roh; Editing by Sam Holmes)

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