Features South Korea Policy

PREVIEW: South Korea’s central bank seen holding rate cut until later this year

31, May. 2019

By Tetsuo Sakabe

SEOUL, NNA - The Bank of Korea is expected to lower the key interest rate by the end of the year to stop economic growth from sliding further amid sluggish global demand for semiconductors, but it is likely to stand pat at Friday’s policy meeting, economists said.

The bank’s policy stance is currently neutral. It has left its Base Rate steady at 1.75 percent since it raised it by a quarter percentage point in November to keep the U.S.-Korean interest rate differential from widening and counter record household debt.

Now that domestic growth has shown signs of a slowdown and inflation is running well below the official 2-percent target, a shift to an easing stance would be justified, economists said.

Chung Min, a research fellow at Hyundai Research Institute, said that the bank is likely to lower the benchmark rate by 0.25 percentage point in the second half of this year.

Credit rating agency Moody’s Investors Service has said the BOK should consider easing monetary policy, given loose global liquidity conditions and weak inflationary pressures at home.

As for the timing of a rate cut, Shinkan Bank economist Paik Seokhyun said the bank had not shown any signs of easing any time soon.

“The BOK may be cautious about it (cutting rates now), even though the property market is stabilizing,” said Lee Jipyeong, senior research fellow at LG Economic Research Institute.

The government has been trying to curb household debt, which has exceeded 1,500 trillion won ($1.3 trillion), nearly the size of the country’s gross domestic product. Lowering interest rates could encourage more borrowing.

South Korea’s economy unexpectedly shrank for the first time in more than a year in the January-March quarter, hit by a sharp drop in business investment and continued weak exports amid the U.S.-China trade row, data released last month showed.

The 0.3 percent quarter-on-quarter contraction was the export-dependent economy’s worst performance since it tanked 3.3 percent in the final quarter of 2008 at the peak of the global financial crisis.

Inflation remains subdued, accelerating just 0.6 percent from a year earlier in April, far below the official target of 2 percent, giving the central bank room to stave off deflation by cutting interest rates.

The Korean Development Institute (KDI), a publicly funded think-tank that helps the government formulate economic policy, said last week that monetary policy needs to be substantially accommodative to counter slowing inflation and sluggish domestic demand.

Market participants regard any policy advice from the KDI as a view representing the finance ministry because the institute rarely gives specific recommendations.

In its quarterly economic outlook released last month, the Bank of Korea revised down its growth forecast for this year to 2.5 percent from the 2.6 percent projected three months earlier, on moderating consumption and slower exports, but its forecast for 2020 was unchanged at 2.6 percent.

It also revised down its inflation forecast to 1.1 percent for 2019 from 1.4 percent projected in January, citing downward pressure from energy and commodities prices. The bank maintained its 2020 forecast for inflation at 1.6 percent, but that is still below its medium-term target of 2 percent.

In a similar move, the Organisation for Economic Co-operation and Development has trimmed its South Korean economic outlook for this year to 2.4 percent from 2.6 percent previously.