(Bloomberg) -- South Korea’s central bank cut its policy rate for the second time this year and warned that growth would be weaker than forecast as a global economy hit by trade tensions slows.
The move comes amid a wave of rate cutting by central banks around the world to shore up growth and highlights the sense of urgency at the Bank of Korea to offer further support for the economy, especially with consumer prices falling. Governor Lee Ju-yeol had repeatedly said the BOK had some policy room to act while expressing doubts over whether the bank’s growth forecast for this year could be achieved.
The decision to lower the main policy rate to 1.25%, matching a previous record low, was forecast by 21 of 25 analysts surveyed by Bloomberg. The rest expected the bank to leave the rate unchanged. Markets showed little response to the rate reduction, an indication that it had largely been priced in.
Central banks have been adding stimulus as the effects of a global slowdown seep into economies around the world, with Australia, India, and Singapore among those to have taken action this month. Judging by the pace and extent of cuts so far, the BOK has been on the cautious side in taking rates lower as it remains wary of financial risks from too-low interest rates.
Recent data have continued to paint a gloomy picture of South Korea’s economy. Exports dropped for a tenth month in September, industrial production contracted more than expected in August, and consumer prices have started to fall in lockstep with declining producer prices.
In July, the BOK forecast the economy would expand at 2.2% this year, a projection that it now sees as untenable. In a statement, the central bank reiterated its intention to keep judging whether it was necessary to adjust the degree of policy accommodation, leaving the door open to another possible cut.
The International Monetary Fund added to the increasingly gloomy view for the outlook with its latest forecasts predicting the slowest expansion of the world economy this year since the global financial crisis. The IMF also slashed its projection of growth for South Korea this year to 2% from an earlier view of 2.6%.
While a truce between China and the U.S. may offer some relief to global trade, previous developments in the tariff tussle have shown tensions can quickly flare up at any time
Rate Path
Central bank watchers will be looking to see whether Governor Lee will hint at further moves to come at his press conference later in the day.
“The key question is when the BOK will cut again, and given the economic fundamentals are not looking good, markets should be prepared for another cut,” said Cho Yong-gu, a fixed-income strategist at Shinyoung Securities. “It may come in the first half of next year or later and the BOK may opt to cut rates to aid an economic recovery if tech demand bottoms out.”
According to a Bloomberg survey conducted Oct. 1-8, about half of the 25 respondents expect the policy rate to remain unchanged at 1.25% throughout 2020, while a slightly smaller group forecast a further lowering of rates to 1% or 0.75%. Two still expect a hike sometime next year.
The BOK is scheduled to update its gross domestic product and inflation projections at its November meeting. Signals of a significant downgrade by Lee on Wednesday may prompt analysts to bring forward their projected rate cut timing, or amend their calls for no change.
“We think growth will continue to struggle for momentum over the coming quarters,” Alex Holmes, an economist at Capital Economics, wrote in a note after the decision. The firm expects further rate cuts next year to guard against the threat of a prolonged period of damaging deflation, Holmes wrote.
Still, reasons remain for a cautious approach by the BOK. Heightened concerns over low rates leading to a property bubble in some parts of Seoul, or potential capital outflow and won weakness, may bolster views for a prolonged holding pattern at the latest rate level. Lee has said South Korea’s lower bound on rates needs to be higher than those for key currency economies, without specifying a figure.
What Bloomberg’s Economists Say
“We think limited policy space and concerns about financial risks mean the BOK will likely keep its benchmark rate steady in the year ahead -- barring a significant escalation in trade tensions or sharper deterioration in global growth. An expansionary fiscal stance from the government should also help support the economy.”
--Justin Jimenez, associate
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(Adds details from BOK statement)
