(Reuters) - The Bank of Korea is forecast to cut interest rates this week, a Reuters survey shows, a sharp turnaround in market expectations over the past month that raises questions about the central bank's independence.
The shift in sentiment from a rate rise came after new Finance Minister Choi Kyung-hwan last month launched an aggressive set of stimulus policies and put overt pressure for rate cuts to prop up faltering growth.
And Bank of Korea Governor Lee Ju-yeol has rowed back on policy tightening signals, seeming to undermine his promise in March that boosting trust in the central bank as an independent interest rate-setter was among his top goals.
"Cutting the rate would be a wrong move," said Kim Tae-dong, a member of the Bank of Korea's monetary policy committee in the early 2000s, a view shared by many analysts who say a U-turn in policy stance would undermine the governor's credibility.
Still, 27 of 31 analysts surveyed by Reuters expect Lee to cut the policy rate KROCRT=ECI by 25 basis points to 2.25 percent on Aug. 14, which would be the lowest since early November 2010. In a poll early last month, only three of 23 analysts saw a cut as the bank's next move.
A rate cut on Thursday would be the first since May 2013, when the central bank under a different governor lowered the rate in what was also widely seen as cooperating with government stimulus efforts.
The dramatic shift in expectations came after Choi, who took office last month, moved rapidly to jump-start demand with a raft of measures including an $11 billion stimulus package and a call for broader structural steps to avoid the risk that Korea could slip into Japan-style deflation.
GOVERNMENT INTERFERENCE
While the Bank of Korea's independence to set monetary policy is guaranteed by law, the government has a long track record of pressuring the central bank to cooperate on policy direction.
"I think (the rate cut) will be primarily aimed at cooperating with the government and therefore will be a one-off action," said Kim Jong-su, a fixed-income analyst at Taurus Investment & Securities.
The finance minister has argued that underlying weakness in South Korea's economy is far more serious than headline numbers suggest, with household income growing too slowly and corporate investment weak.
South Korea's economy grew 0.6 percent in the second quarter from the previous three-month period, the weakest in more than a year and a slowdown from the 0.9 percent rise in each of the previous two quarters.
Choi's aggressive policies have helped to boost confidence that had been battered in the aftermath of the April 16 Sewol disaster that killed about 300 people, with stock prices scaling three-year highs, and department-store sales and housing prices making solid gains.
But former central banker Kim said easing policy now sends the wrong signal even though many analysts don't expect such a move to foreshadow more rate cuts.
"It doesn't make sense at all that they are cutting interest rates when the household debt is at that high level," Kim said, adding that a rate cut would be the result of government pressure.
South Korean households carry debt of more than 1.6 times their annual disposable income, among the heaviest loads in the world, and higher than in the United States at the time of the 2007-2008 financial crisis.
The Bank of Korea has said it views the economic slowdown in the second quarter as tentative and expects growth to pick up from the current quarter, while predicting inflation will gradually quicken in line with economic recovery.
Inflation has remained below the central bank's 2.5-3.5 percent target zone for two years but is widely expected to head higher in coming months.
reuters.com
The shift in sentiment from a rate rise came after new Finance Minister Choi Kyung-hwan last month launched an aggressive set of stimulus policies and put overt pressure for rate cuts to prop up faltering growth.
And Bank of Korea Governor Lee Ju-yeol has rowed back on policy tightening signals, seeming to undermine his promise in March that boosting trust in the central bank as an independent interest rate-setter was among his top goals.
"Cutting the rate would be a wrong move," said Kim Tae-dong, a member of the Bank of Korea's monetary policy committee in the early 2000s, a view shared by many analysts who say a U-turn in policy stance would undermine the governor's credibility.
Still, 27 of 31 analysts surveyed by Reuters expect Lee to cut the policy rate KROCRT=ECI by 25 basis points to 2.25 percent on Aug. 14, which would be the lowest since early November 2010. In a poll early last month, only three of 23 analysts saw a cut as the bank's next move.
A rate cut on Thursday would be the first since May 2013, when the central bank under a different governor lowered the rate in what was also widely seen as cooperating with government stimulus efforts.
The dramatic shift in expectations came after Choi, who took office last month, moved rapidly to jump-start demand with a raft of measures including an $11 billion stimulus package and a call for broader structural steps to avoid the risk that Korea could slip into Japan-style deflation.
GOVERNMENT INTERFERENCE
While the Bank of Korea's independence to set monetary policy is guaranteed by law, the government has a long track record of pressuring the central bank to cooperate on policy direction.
"I think (the rate cut) will be primarily aimed at cooperating with the government and therefore will be a one-off action," said Kim Jong-su, a fixed-income analyst at Taurus Investment & Securities.
The finance minister has argued that underlying weakness in South Korea's economy is far more serious than headline numbers suggest, with household income growing too slowly and corporate investment weak.
South Korea's economy grew 0.6 percent in the second quarter from the previous three-month period, the weakest in more than a year and a slowdown from the 0.9 percent rise in each of the previous two quarters.
Choi's aggressive policies have helped to boost confidence that had been battered in the aftermath of the April 16 Sewol disaster that killed about 300 people, with stock prices scaling three-year highs, and department-store sales and housing prices making solid gains.
But former central banker Kim said easing policy now sends the wrong signal even though many analysts don't expect such a move to foreshadow more rate cuts.
"It doesn't make sense at all that they are cutting interest rates when the household debt is at that high level," Kim said, adding that a rate cut would be the result of government pressure.
South Korean households carry debt of more than 1.6 times their annual disposable income, among the heaviest loads in the world, and higher than in the United States at the time of the 2007-2008 financial crisis.
The Bank of Korea has said it views the economic slowdown in the second quarter as tentative and expects growth to pick up from the current quarter, while predicting inflation will gradually quicken in line with economic recovery.
Inflation has remained below the central bank's 2.5-3.5 percent target zone for two years but is widely expected to head higher in coming months.
reuters.com
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