Business / Economy

Bank of Korea warns of weaker growth after cutting rates again

Bloomberg

South Korea’s central bank warned Wednesday 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.

Wednesday’s rate cut 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 percent, 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 percent forecast it gave in July. When asked at a news conference if the economy would expand less than 2 percent this year, Gov. Lee Ju-yeol said he wanted to see data for the third quarter due next week before making a new projection.

With Wednesday’s rate cut already priced into markets, attention focused on whether the bank would signal further cuts to come. Lee, who has warned that South Korea cannot lower rates as much as other key economies can, said the BOK still has room to reduce rates if needed and wasn’t in need of unconventional measures to support growth and prices.

Still, two BOK board members voted against the rate cut, a difference of opinion that suggests it will become increasingly difficult to convince the board that further reductions are necessary.

Lee stressed it was natural for dissent to arise among board members when uncertainties are high. “What matters is what the majority opinion is,” he said. “Every board member needs to respect the opinion of the majority.”

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 has 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 growth projection for South Korea this year to 2 percent from an earlier view of 2.6 percent.

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.

“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 to 8, about half of the 25 respondents expect the policy rate to remain unchanged at 1.25 percent throughout 2020, while a slightly smaller group forecast a further lowering of rates to 1 percent or 0.75 percent. 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 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.

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