Bank of Korea surprises markets with first rate cut in 3 years as economy slows

19, Jul. 2019

SEOUL, NNA - The Bank of Korea unexpectedly cut its policy rate and slashed its economic growth and inflation forecasts on Thursday, joining emerging market central banks in easing in the face of growing downside risks amid the U.S.-China trade row and sluggish global demand for semiconductors.

The central bank acted amid concern that Japanese restrictions on exports of key chip-making materials to South Korea could also hurt the semiconductor industry, and thus the export-reliant economy.

The last policy change was in November, when the BOK raised the rate by a quarter percentage point to keep the U.S.-Korean interest rate differential from widening and to curb the growing pace of household debt.

Key Points:

―― The BOK’s policy board lowered the Base Rate by 25 basis points to 1.50 percent. It was the first rate cut since June 2016, when it trimmed the benchmark lending rate by 25 basis points to 1.25 percent. The central bank subsequently raised the rate twice, in November 2017 and November 2018.

―― The central bank’s policy statement said the board also downgraded its GDP forecast this year to “the lower-2 percent level” from its April forecast of 2.5 percent. It forecast inflation would fall short of its April projection of 1.1 percent and fluctuate for some time “below 1 percent” and then run at “the low- to mid-1 percent level” from next year.

―― The bank said that “the pace of global economic growth has continued to slow as trade contracted mainly due to the U.S.-China trade dispute.” It also said “global economic growth and the global financial markets are likely to be affected by factors such as the degree of the spread of trade protectionism, the changes in the monetary policies of major countries, and geopolitical risks.”

―― In light of these developments, the bank noted, “the pace of domestic economic growth has slowed as construction investment has continued undergoing an adjustment and the slowdowns in exports and facilities investment have deepened.”

―― The bank projected that the adjustment in construction investment would continue and that exports and capital investment would recover “later than originally expected.”

―― The bank noted that stock prices and the won-dollar exchange rate have fluctuated considerably, mainly affected by the U.S.-China trade dispute and Japan’s export restrictions.

Takeaway:

―― The BOK said the board would conduct monetary policy to ensure that the recovery of economic growth continues and inflation can be stabilized at the 2 percent target level over the medium-term.

―― The board will maintain its “accommodative” policy stance, as domestic economic growth is expected to moderate and inflationary pressures will remain at a low level.

―― BOK Governor Lee Ju-yeol told reporters after the policy meeting that the central bank still has room to ease further, according to news reports.