Bank of Korea Hints at Future Rate Cut as Risks to Economy Rise

(Bloomberg) --

The Bank of Korea hinted it was considering further action to support the economy should risks continue to rise, after leaving its key interest rate unchanged Friday.

The South Korean central bank kept its seven-day repurchase rate at 1.5% as forecast by 22 of 25 economists surveyed by Bloomberg. A majority of analysts expect borrowing costs to be lowered later this year, a separate Bloomberg News survey showed.

“There is some room in monetary policy to respond to economic situations if necessary,” Bank of Korea Governor Lee Ju-yeol told reporters, following the decision to keep policy on hold after cutting rates in July for the first time in more than three years. "Future policy will depend on external risks, and how they affect the domestic economy and financial markets.”

Two out of seven BOK board members dissented from Friday’s decision and called instead for an immediate rate cut, an indication of growing concern at the BOK that more must be done to prop up growth.

Ahead of the latest decision economists had said that consecutive rate cuts were unlikely as they would have suggested policy makers thought the economy was in a critical state, an impression officials in South Korea are keen to avoid. Standing pat would also offer time for the central bank to assess the impact of the Federal Reserve’s next decision in September.

“If the Fed acts in September, the Bank of Korea will probably go ahead with a cut in October,” said An Young-jin, an economist at SK Securities. “Policy makers wanted to avoid coming under fire for a back-to-back cut that ended up being a dud.”

The BOK joined a global wave of monetary easing last month, pushing borrowing costs close to an all-time low. Despite the added policy support, Korea’s economic outlook remains challenging. The U.S.-China trade war continues to sap global demand, while the country’s own spat with Japan is threatening to disrupt tech production.

Murky Outlook

Uncertainties over growth and inflation forecasts have increased, the bank said Friday, citing the U.S.-China trade war and geopolitics as risks to the economy. Since the BOK lowered its rate last month, Japan has taken South Korea off the list of its preferred trading partners, prompting Seoul to terminate a U.S.-backed intelligence-sharing pact with Tokyo.

Tokyo’s decision to restrict some specialist tech exports to key Korean tech sectors such as its semiconductor manufacturing is also clear risk for the economy. Lee acknowledged that it would have an impact though it was still difficult to gauge, given that Japan is still approving some of the exports.

“Japan isn’t the only thing: the escalating Hong Kong protests, the growing chance of a no-deal Brexit, the uncertainty over Italy’s coalition government, and many bigger geopolitical risks have appeared,” Lee said, expanding the list of concerns on the radar of the central bank.

South Korea’s exports are headed for a ninth straight monthly decline while inflation remains far below the central bank’s 2% target. Unemployment has remained at or above 4% for four months in a row in July, the longest streak of such job market weakness since 2001.

Against this backdrop, an increasing number of economists are lowering their growth forecasts. The consensus is for just a 2% expansion this year, an outcome that would be the Korean economy’s worst annual performance since the global financial crisis.

The government plans a 9.3% increase in fiscal spending for 2020, a record budget to boost growth, though some economists still see it as insufficient. Government spending helped the economy rebound in the second quarter from the sharp contraction of the previous three months.

What Our Economists Say

“Escalating trade spats -- between the U.S. and China, and South Korea and Japan -- will likely take a further toll on already-battered exports and investment. Sluggish inflation in South Korea and hints of more aggressive rate cuts from the Federal Reserve give the BOK room to ease further.”

--Justin Jimenez, Associate

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--With assistance from Hooyeon Kim.

To contact the reporters on this story: Sam Kim in Seoul at skim609@bloomberg.net;Hooyeon Kim in Seoul at hkim592@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Paul Jackson

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