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Is it time for central bank to move benchmark interest rate?

South Korea’s central bank is likely to leave its benchmark interest rate unchanged despite the nomination of a new hard-line finance minister and lingering worries over the strong currency, according to a survey of foreign analysts.

A total of 19 of 23 analysts at foreign financial firms expected a freeze, while the remaining four predicted a possible hike later this year, Yonhap reported on Monday, citing a survey by Bloomberg.

The result came as a bit of a surprise since there has been growing speculation among market watchers in South Korea recently that the Bank of Korea would lower the key policy rates to boost the economy.

The main factor supporting the possible rate cut is Finance Minister-nominee Choi Kyung-hwan.

Choi recently referred to the country’s economic recovery as “slow,” and his nomination raised speculations that the three-term lawmaker, who is also considered a close aide of President Park Geun-hye, would pressure the central bank to loosen its monetary policy in order to support the economy.

No rate cut for now

Foreign investment firms, however, predicted that the BOK would keep its benchmark rate unchanged for the time being, given the country’s growing household debt, which exceeded 1,000 trillion won ($931.3 billion) for the first time this year.

French lender Societe Generale said in the report that the BOK would not need a rate cut, considering the country’s current economic data.

Nomura Holdings also noted there is little possibility of a rate cut since the central bank is seeking to deal with the mounting household debt.

BOK’s stance

Bank of Korea Gov. Lee Ju-yeol is still too cautious about cutting or hiking the key rate, which the central bank kept unchanged at 2.5 percent for more than a year.

Lee hinted in April at raising the key interest rate later this year to rein in growing inflationary pressure resulting from economic recovery.

But the governor has changed his stance recently, saying that any rate rise would only come if the economy shows stronger growth than the bank estimated.

“The finance ministry and the central bank have their own mandates and roles,” Lee told reporters last week when asked how he will work with the new finance minister, indicating he would not allow any outside interference. 

Lingering pressure

Market watchers say there are still lingering concerns that may force the BOK Gov. Lee to consider a possible rate cut, such as the recent economic slump prompted by April’s deadly ferry accident as well as the strong local currency.

The central bank’s next monetary policy committee meeting is slated for July 10. On the same day the BOK is also scheduled to announce a revised outlook on the country’s economic growth. The key interest rate has remained at 2.5 percent since it was lowered from 2.75 percent in May 2013.

By Oh Kyu-wook (