Downside risk concern grows inside BOK policy rate-decision board

2019.06.19 14:18:34 | 2019.06.19 17:05:26

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Bond investors saw the skeptical tone from the minutes of South Korea`s latest monetary policy meeting as opportunity to raise their bets on an imminent rate move by the country`s central bank.

The minutes of the May 31 meeting that kept the policy rate at 1.75 percent, unchanged since a hike in November last year, showed that there had been a second dovish voice besides Cho Dong-chul, who threw a dissenting vote among the seven members.

Bond yields fell across the board on the news. The three-year government bond yield slipped 0.9 basis points to close Wednesday at 1.484 percent. The yield on the five-year note saw a sharper fall, down 1.3 basis points at 1.513 percent. The 10-year bond yield was also 1.3 basis points lower at 1.601 percent.

According to the minutes, one of the members said the case for a rate cut is building up in light of the growing downside risks to economic growth and subdued prices, and proposed giving a heads up before making a rate move. The market presumes the opinion to have come from another dovish member Shin In-seok.

The general tone at the meeting had also been skeptical.

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Excepting the chair, Bank of Korea Governor Lee Ju-yeol, four other members expressed doubts about the economy in the second half. One member said that given Korea’s economic trajectory, it would be hard to achieve the 2019 growth rate target of 2.5 percent estimated by the BOK in April.

One member proposed waiting for the second-quarter data before acting on a rate move, suggesting a vote for a cut if the gross domestic product does not improve from the 0.4 percent fall in the first quarter. A technical definition of a recession is two consecutive quarters of negative economic growth.

The grim economic conditions have prompted a shift in tone from the BOK chief. After months of playing down the odds of an easing action, Lee delivered his strongest-yet signal of a rate cut last week at an event marking the BOK’s 69th anniversary, saying there was “a need to take timely action against changes in economic conditions.”

Analysts say the BOK could consider making a move in either July or August after the U.S. Federal Reserve makes its rate decision on Wednesday after a two-day policy meeting. While the U.S. central bank is not expected to make any policy changes, investors are betting on a more eased monetary policy stance from the Fed, with signals for a rate cut as soon as July.

The BOK will hold the next rate-setting meeting on July 18 when it is also expected to announce the revised economic growth outlook for this year.​

By Lee Yoo-sup and Kim Hyo-jin

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