Bank of Korea forecasts in focus for exit clues

Bloomberg

Investors will scrutinise forecast upgrades expected from the Bank of Korea (BOK) for hints about when the bank
is likely to end its run of record-low interest rates.
South Korea’s central bank is seen raising its growth and inflation projections significantly at its Thursday meeting after recent economic data beat expectations. Still, analysts see the bank holding its key rate at 0.5%, as the board weighs buoyant exports against Covid uncertainty.
“Korea’s economy has shown great resilience, despite still elevated daily Covid cases and an extended period of tighter social movement restrictions,” Barclays Bank economist Angela Hsieh wrote in a report last week. Still, the BOK may “err on the side of caution” given recent virus flare-ups in Asia, Hsieh wrote, expecting a hike in the first quarter of 2022.
Consumer spending has picked up, adding to South Korea’s export recovery, since the BOK in February projected 1.3% inflation and 3% growth for 2021. President Moon Jae-in this month raised the possibility that the economy could expand more than 4% this year.
Improving economic data has led swap markets to price in almost two rate increases over the next 12 months. Those hawkish bets contrast with the median projection from analysts, who don’t see a hike until the third quarter of 2022.
Speculation has largely subsided that the bank might resort to unconventional tools or further easing this year.
Instead, the focus has turned to whether the BOK might raise rates ahead of its regional peers as it did in 2017, when it was Asia’s first major central bank to tighten following rate hikes by the Federal Reserve at the end of 2015.
Investors will scrutinise Governor Lee Ju-Yeol’s comments at for any signs of a shift in his stance.
He previously pledged to keep policy accommodative until a recovery is secured.
The timing of tightening expected by analysts could be brought forward if Lee is upbeat on the economy, or expresses greater concern over rising inflation and debt growth. On the other hand, continued focus on supporting the recovery would point to a prolonged rate hold.