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By Yoo Choonsik
SEOUL, June 9 (Reuters) - South Korea's central bank looks certain to hold interest rates steady at a record low for a fourth consecutive month on Thursday, so investors' main focus will be to scour its statement for clues on future policy.
The BOK reduced the benchmark 7-day repurchase agreement
rate
It has held rates steady since then.
Here are some possible comments that the Bank of Korea (BOK) and its governor, Lee Seong-tae, may make on Thursday and the expected reaction from markets:
BOK ISSUES SAME VIEW AS IN MAY
This is the most likely case. While the economy is showing tentative signs of bottoming out, there are no clear signs of recovery and authorities are still worried about unemployment, currently at its highest level since October 2005.
The BOK said in its May policy statement that the pace of the economic slowdown had moderated but that downside risks to growth persisted. It concluded that policy would remain accommodative. [ID:nSEO144556]
It also referred to a narrowing scale of decline in exports and sluggish domestic demand, factors that have not changed since.
It also suggested that downside risks for the economy persisted because of a deterioration in the labour market, highlighting a broad concern of authorities and their need to remain cautious about a potential recovery.
If the economic assessment is unchanged, financial markets may read that as indicating the central bank accepts the market's view that interest rates have bottomed out and will eventually rise.
That would provide modest support to the currency and might prompt some knee-jerk bond sales, although bonds have already factored in expectations that the central bank is done cutting rats.
The spread between 1- and 10-year treasury bond yields has widened out to 274 basis points from as small as 210 points in late April.
BOK COMMENTS ON SHORT-TERM LIQUIDITY
The BOK may comment on the potential impact of ample short-term liquidity, although it will do so in a cautious manner so as not to shake money markets.
The head of the country's top financial regulatory agency said last week he would take measures should ample short-term liquidity "disturb" the markets. [ID:nSEO278869]
Domestic media have published stories warning that the excessive short-term liquidity could lead to asset price bubbles even before the economy fully recovers.
Seoul's junior Kosdaq stock market <.KQ11> has risen above the level seen when the current crisis began in mid-September and the spread of yields between high-quality corporate bonds and treasury bonds has fallen below mid-September levels.
Domestic money markets will take a hit on concerns the central bank will absorb cash liquidity.
BOK SOUNDS LESS CAUTIOUS ABOUT ECONOMY
The BOK may say the downside risks to economic growth have been reduced, while maintaining a cautious view on the timing of a sustained recovery.
Such a view would raise expectations that the next move in
rates by the central bank will be up and would probably prompt
a sharp fall in bond prices <0#KRBMK=> and provide the Korean
won
South Korea's economy skirted a recession in the first quarter and policy makers have said Asia's fourth-largest economy would probably not contract in coming quarters.
April industrial production and the May value of exports per day both expanded for a fourth consecutive month over the previous month and consumer and business confidence has been improving quickly.
But the export-dependent economy is picking up from a low base. It is still shrinking compared with a year earlier and the government does not expect a return to growth until late this year or early next year.
BOK SAYS RATE HIT BOTTOM
This is most unlikely and the central bank has rarely provided clear signals in the past. It even raised interest rates in 2005 just a month after it had said inflation was heading lower.
It would not provide an explicit comment on rates. However, a reference to how the bond market is performing might be taken by dealers as a signal from the central bank on how it is viewing interest rates. (Editing by Neil Fullick)