Jul 17, 2019
Bank of Korea cuts key interest rate as risks to economy grow
Bloomberg News
,The Bank of Korea lowered its benchmark interest rate less than a year after last raising it, joining a growing number of global central banks acting to shore up cooling economies.
The BOK cut the seven-day repurchase rate to 1.5 per cent from 1.75 per cent, it said Thursday. The result was forecast by 10 of 25 analysts surveyed by Bloomberg.
Their first rate cut since 2016 reflects some urgency among BOK policy makers, who face growing pressure as the nation’s export slump drags on and other central banks cut rates or signal they will soon. Some expected the BOK to wait for the Federal Reserve to act later this month before following suit.
“There just isn’t any economic recovery happening yet in South Korea,” An Ki-tae, an economist for NH Investment & Securities in Seoul, said before the decision was announced.
The U.S.-China trade war, China’s own economic slowdown and a slump in the semiconductor sector have sent Korean exports tumbling for seven straight months. Growing tensions with Japan have further dimmed the outlook.
The BOK raised rates in November, joining its Asian peers in pushing borrowing costs higher as the Federal Reserve’s rate-hike cycle pressured currencies and drew money out of the region. Eight months later, global monetary policy has shifted course as the trade war has dragged on.
BOK Dilemma
Another factor in that November hike -- which took the rate only a half percentage point above an all-time low -- was record household debt and elevated property prices.
After the last policy meeting in late May, BOK Governor Lee Ju-yeol cited growing concerns about a prolonged trade war but said the central bank must also consider financial stability. He noted that household debt remained “very high” by any measure.
Still, there were signs a rate cut might be coming. Board member Cho Dong-chul dissented at the May meeting, saying the central bank should lower rates. Another board member said a cut was needed to address deteriorating economic conditions but should take place in July. The central bank didn’t name the second person.
Lee’s comment last month about “appropriately” responding to economic changes was also seen by some as signaling a cut.
Economic Outlook
Lee has said the economy was recovering after an unexpected contraction during the first quarter from the previous three months. Lee will hold a news conference later Thursday in which he’ll announce the BOK’s updated growth and inflation forecasts.
The BOK forecast 2019 growth of 2.5 per cent and inflation of 1.1 per cent in April. Economists surveyed by Bloomberg see growth of 2.1%, the lowest since 2009.
Inflation remains far below the BOK’s 2 per cent target, coming in below 1 per cent for six consecutive months.
What Bloomberg’s Economists Say
"South Korea’s export outlook remains weak, despite recent positive developments in the U.S.-China trade war. A trade spat with Japan adds uncertainty to the outlook."
--Justin Jimenez, Asian associate
--With assistance from Hooyeon Kim and Shinhye Kang.