Market expectations on a rate freeze by the Bank of Korea in its September meeting are gaining ground here as the chances for the Federal Reserve to raise its fund rate have been slashed due to a poorer-than-expected US jobless report. 

More and more analysts are betting that the Korean central bank would keep the benchmark borrowing rate at the current 1.25 percent at its Sept. 9 monetary policy meeting, shifting away from their previous forecasts of a rate increase. The previous rate cut to its historic low was made in June. 

Many market watchers had pinned their hopes on a second rate cut by the BOK in September on a belief that a one-time cut would not be enough to stimulate the sluggish economy recently hit by the corporate restructuring moves. 

“For the past four weeks, economic conditions at home and abroad have changed in a way that significantly reduced the probability for the BOK to make another cut,” said Lee Seung-hoon, an analyst at Samsung Securities. “The growing household debt here and prospects of a US rate hike are giving the BOK few options to choose.”

The rising debt is projected to be a major issue at the upcoming BOK meeting as its Governor Lee Ju-yeol has made related remarks several times last month. 

“A higher base rate could cause problems with the growing household debt,” said Kim Moon-il, an analyst at eBEST Investment & Securities. “The debt problem would have the BOK keep the base rate at the current level for months.”

The market is closely watching the prospects of a Fed rate hike, too.   

The chances for a rate hike by the Fed have been lowered as a jobless report from Washington turned out to be poorer than expected in August.  

It has been highly expected that some improvement in the US labor market would make the Fed go for its second rate increase this month as Fed Chair Janet Yellen said at the Jackson Hole Economic Policy Symposium in August.  

However, US payrolls in the non-agricultural sectors grew 151,000 last month, hovering below the 180,000 mark forecast by market watchers. The August figure is far lower than a 275,000 gain in July. 

In a speech on Friday, Richmond Fed President Jeffrey Lacker said interest rates will need to move higher unless employment growth “slows significantly.” He, however, didn’t particularly mention the August report, leaving many analysts around the world to predict the Fed would hold off any rate increase until December.  

After the jobs report announcement, Korean analysts have got more confused about upcoming Fed decision on its second rate hike this year. 

“As Chair Yellen usually factors in three-month average figures when deciding the rate, there is still a possibility for an increase,” said Kim Soo-yeon, an analyst at Hanwha Investment & Securities. “Although the August figure turned out to be weaker than expected, conditions for the labor market can be considered solid and steady.”

“Any cautious Fed decision would limit the BOK’s room for its monetary policy,” said Shin Dong-soo, an analyst at Eugene Investment & Securities. “Since the BOK governor has been saying several times that the BOK rate should be higher than that of major countries, it is expected to keep the rate unchanged at least in September.”  

By Song Su-hyun
(song@heraldcorp.com)