Bank of Korea Warns of Weaker Growth After Cutting Rates Again
The decision to lower the main policy rate to 1.25%, matching a previous record low, was forecast by 21 of 25 analysts.
(Bloomberg) -- South Korea’s central bank warned that economic growth would be weaker than forecast after cutting its policy rate for the second time this year as a global downturn pummels exports and weighs on prices.
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 prop up a sputtering economy, especially with consumer prices falling. 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 bank said growth this year wouldn’t reach the 2.2% forecast it gave in July. Governor Lee Ju-yeol said he wanted to see data for the third quarter due next week before making a new projection, when asked at a news conference if the economy would expand less than 2% this year.
With a rate cut on Wednesday already priced into markets, attention focused on whether the bank would signal further cuts to come and whether interest rates alone could keep the economy on track. Lee, who has warned that Korea cannot lower rates as much as other key economies can, said the BOK still has room to reduce rates if needed. He insisted that the bank wasn’t currently in need of unconventional measures to support growth and prices.
Still, offering a hint that steps like quantitative easing might have a place in the BOK’s policy tool kit in the future, he added that the bank was exploring options outside of rate cuts should its room for maneuver shrink.
For the time being, just cutting rates may prove increasingly difficult after two BOK board members voted against the rate cut. Lee stressed it was natural for dissent to arise among board members when uncertainties are high.
“What matters is what the majority opinion is,” Lee said. “Every board member needs to respect the opinion of the majority.”
Global Swing
Additional stimulus moves by the Federal Reserve and the European Central Bank have been followed this month by rate cuts in Australia, India, and Singapore. Judging by the pace and extent of the BOK’s cuts so far, it has been on the cautious side in taking rates lower as it remains wary of financial risks from 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.
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 the global trade tensions flagged by the IMF as dragging on growth, previous developments in the tariff tussle have shown tensions can quickly flare up at any time
Rate Path
“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.
The lack of unity on the board is likely to dampen expectations for another near-term rate move. South Korea’s three-year treasury bond futures fell as soon as Lee revealed in his opening remarks that two board members had called for a freeze on rate cuts.
“Expectation for another cut is certainly smaller than before the board meeting,” said Park Seok-gil, an economist at JPMorgan. “A further cut is still possible depending on situations even though two people dissented.”
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. While Governor Lee said growth in household debt had eased since the July rate reduction, he said keeping rates very long for a long time still risked financial stability and a fueling of the property market.
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
Click here to read more.
--With assistance from Jiyeun Lee and Hooyeon Kim.
To contact the reporter on this story: Sam Kim in Seoul at skim609@bloomberg.net
To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Paul Jackson
©2019 Bloomberg L.P.