An upcoming confirmation hearing for a pro-growth finance minister nominee, scheduled ahead of the monthly rate-setting meeting, is adding to speculation that the central bank may take action to boost growth in Asia's fourth-largest economy.
On Tuesday, the National Assembly is scheduled to hear from three-term ruling party lawmaker Choi Kyung-hwan. Two days later, the Bank of Korea (BOK) is set to vote on the key rate and release its revised economic growth outlook.
Choi's nomination lent a hand to a minority view that the BOK will cut the benchmark seven-day repo rate after freezing it at 2.5 percent for the 13th straight month in June. The yield on three-year government bonds continued to set a yearly low following Choi's June 13 nomination as markets bet on a rate cut.
A set of negative economic data testifying to sluggish domestic demand further stoked speculation of a rate cut against the common view the central bank will keep the current rate until at least the year-end.
The central bank may trim its growth forecast by 0.2 percentage point, which would indicate the overall recovery pace may remain intact during the second half of the year.
The South Korean economy grew 0.9 percent in the first quarter from three months earlier, matching the 0.9 percent on-quarter gain in the fourth quarter, according to the data by the central bank.
From a year earlier, the South Korean economy grew 3.9 percent in the first three months of the year, picking up from a 3.7 percent growth in the fourth quarter.
But the April 16 ferry disaster that left more than 300 people dead took a toll on the economic side, sapping private spending.
Sales at South Korea's major discount outlet chains and department stores gained 1.2 percent on-year in May but failed to fully recover from a 4.1 percent on-year drop in the previous month.
A state-run think tank said earlier in the day that the country's economy is showing signs of a "delayed recovery," still affected by fallout from the deadly ferry disaster.
"The Korean economy exhibited a delayed economic recovery with the ongoing impacts of the Sewol ferry tragedy," the Korea Development Institute (KDI) said in a monthly report that analyzes the latest economic trends.
The KDI said that consumption-related indicators remained "tepid," and production-related indicators also showed "sluggish"
movements, but experts still seemed to see an overall improvement trend.
South Korea's consumer price growth remained in the 1 percent range for the eighth straight month in June, growing 1.7 percent on-year and running below the BOK's inflation target band of
2.5-3.5 percent. Core inflation, which excludes volatile oil and food prices, rose 2.1 percent from the previous year.
"There are some structural difficulties for domestic demand to recover. The won continues to appreciate and export growth is likely to have peaked in the first quarter," said Kwon Han-wook, an analyst at Kyobo Securities Co.
"Against such a backdrop, the policy event is a factor that could affect the rate-setting decision," he said, projecting a rate cut in July or August.
Recent government data showed that while shipments to the United States jumped 15.8 percent, exports to China and the European Union slipped 1.1 percent and 2.2 percent each from the previous year.
Market watchers say that the extent of Choi's comments at Tuesday's hearing will be key in determining the direction of the benchmark rate.
"If the minister nominee stresses the need for a supplementary budget or omnidirectional stimulus measures, it could sway (the monetary policy committee)," said Yoon Yeo-sam, a bond analyst at KDB Daewoo Securities Co.
Yoon, however, added that current economic indicators do not point to an imminent rate cut and projected the BOK to keep the 2.5 percent rate until next year.
Others agreed, citing the potential risk a rate cut may have on the country's already-sizeable household debt.
"Given President Park's agenda to manage household debt, we do not expect the BOK to cut rates during the current financial up-cycle," Nomura economist Kwon Young-sun wrote in a June 20 report.
Kwon forecast the central bank to hike the key rate by a quarter percentage point in December, adding the finance minister nominee is likely to utilize micro-level stimulus measures.
Choi, who will double as deputy prime minister if he clears the hearing, has hinted that he could push to boost the housing market by adjusting regulations such as debt-to-income (DTI) and loan-to-value (LTV) rules. (Yonhap)