The Bank of Korea (BOK) yesterday left its key interest rate unchanged, opting to preserve policy room after two rate cuts this year to support an economy hurt by global trade tensions.
The central bank kept the seven-day repurchase rate at 1.25 percent in its last decision of the year, as expected by all 27 analysts surveyed by Bloomberg.
The central bank cut its annual growth forecast from 2.2 percent to 2 percent, Bank of Korea Governor Lee Ju-yeol told reporters, also trimming its prediction for next year to 2.3 percent from 2.5 percent.
This year’s forecast would be the slowest expansion since 2009, when the nation posted 0.8 percent growth in the wake of the global economic crisis.
The central bank said that exports were facing continuing “sluggishness,” while domestic consumption had also weakened.
The world’s 11th-largest economy is highly dependent on international commerce, but is grappling with the fallout of a prolonged China-US trade dispute while being embroiled in a spat of its own with Japan.
An easing of the dispute between Beijing and Washington would see global investment rise and “contribute to an increase in our exports,” Lee said.
However, that would not be enough on its own to ensure strong economic momentum, he added.
The won was little changed at 1,179.35 against the US dollar after the decision, while the yield on three-year government bonds slipped 1 basis point to 1.43 percent, Bloomberg data showed.
Central banks across the globe have lowered interest rates this year to tackle slowing growth and inflation.
With interest rates now at, or near, record-low levels in many nations, Australia and New Zealand were among those to pause this month to weigh the effects of stimulus against potential risks.
A prolonged period of low interest rates could increase the flow of funds into the property market or risky assets, Lee said.
“The BOK will probably wait and watch at least until March,” Hanwha Investment & Securities economist Kim Jin-myoung said. “Things the BOK will watch are how the bolstering of its accommodative stance this year filters through and how external uncertainties play out.”
The South Korean economy is on course for the slowest expansion in a decade this year with economists’ consensus at 1.9 percent, while next year does not look much better.
Even though most economists believe growth would be better than this year, many attribute it to a base effect as opposed to genuine improvement.
Exports are headed for a 12th monthly decline and inflation has stayed at or below 0 percent for the past few months, far below the 2 percent target.
Industrial output fell more than expected in October from the previous month. On a positive note, consumer confidence has turned optimistic for the first time since April, while chip inventory is falling.
A majority of economists surveyed on their long-term forecasts expect the benchmark rate to remain at 1.25 percent or to be lowered once more. A few expect an additional cut to 0.75 percent, or even an increase.
Although the worst for South Korea could be over, “the likelihood of sub-2 percent growth in 2019, coupled with still-low inflation pressure, is likely to prompt the BOK to cut rates once again in the first quarter of 2020,” Barclays PLC analysts wrote this week.
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