Key rate to stay frozen, say banks

Most investment banks expect the Bank of Korea to keep the key interest rate unchanged this year as the bank takes a wait-and-see stance on the global economic situation, according to investment bank reports compiled by the Korean Center for International Finance.

The BOK left the key borrowing rate unchanged at 2.5 percent last Thursday.

“Investment banks said the central bank’s freezing of the key borrowing rate signals it is monitoring carefully changes in global and Korean economic conditions,” said Lee Jung-hwa, a research fellow at the center. “Only a few investment banks including BNP Paribas forecast the central bank will make a rate cut within the third quarter to tackle low consumer prices and the country’s economic growth, which has remained lower than the global trend.”

Economists at Barclays Capital, JPMorgan, BofA Merrill Lynch, Citigroup, Goldman Sachs, Nomura, HSBC and RBS said they expect no rate change this year.

Goldman Sachs and Nomura said in a report that the BOK is likely to normalize the rate beginning in the second half of next year while HSBC and RBS forecast the central bank will maintain the rate as long as through the July-September period next year.

Meanwhile, Barclays Capital and Credit Suisse said there’s still a chance that the BOK may cut the rate considering low consumer prices coupled with the sluggish global and Korean economic situations.

Barclays said a rate cut may happen if the government’s plan to spend a supplementary budget is somehow delayed.

Credit Suisse said a rate cut may happen if the country’s economic recovery is slower than original expectations.

Meanwhile, investment banks including Barclays Capital and Citigroup said Korea’s job market will grow steadily and hiring conditions will remain strong this year, although the country’s unemployment rate went up to 3.2 percent in May, slightly higher than 3.1 percent in April.

Banks said hiring conditions for the second quarter have improved compared to the last six months.

“Banks said the government’s supplementary budget, welfare programs, and increases in corporate investment will provide momentum for employment to recover this year,” Lee Sang-won, a research fellow at the center.

In a separate but related matter, the Federation of Korean Industries said at a seminar yesterday that Korea’s main exporters in shipbuilding, steel, construction and electronics will suffer in the second half of this year. Automobiles were excluded.

Korea Institute of Finance President Yoon Chang-hyun called on the government to make an additional rate cut and implement the supplementary budget soon after his institute estimated the country was likely to achieve a middling 2.6 percent economic growth.

“In the mid- and long-term aspect, the trend of a weak Japanese yen and strong won will not change,” said JP Morgan chief economist Lim Ji-won.

Kim Joo-hyun, president of Hyundai Economic Research Institute, said the world economy is likely to recovery slowly but he told businesses to stay alert to new uncertainties.

BY KIM MI-JU [mijukim@joongang.co.kr]