Money in Korea

Korea - Money

BOK slashes the base rate in July

At its 18 July monetary policy meeting, the Bank of Korea (BOK) voted to cut the base rate to 1.50% from 1.75%, surprising market analysts who had expected the Bank to hold fire until August. The decision, which was not unanimous as one member voted to maintain the rate, marked the first interest rate cut in three years and comes amid an increasingly gloomy outlook for the Korean economy.

The Bank’s decision to lower rates sooner-than-expected was primarily guided by the flagging economy, which experienced a sharp slowdown in Q1. The Bank cited the negative impact that the global growth slowdown and the U.S.-China trade dispute was having on the all-important export sector as particularly concerning. Moreover, the BOK noted that growth likely weakened further in Q2 due to moderating investment and exports, while Japan’s recent imposition of export controls further darkens growth prospects. All told, the Bank of Korea lowered its GDP projection for 2019 to 2.2% (April’s forecast: 2.5%).

On the price front, muted inflationary pressures provided further reason for the Bank to unwind the policy rate. Inflation was stable at May’s 0.7% in June, well below the Bank’s 2.0% target. Looking ahead, the BOK expects inflation to be much more subdued than it had previously projected and to continue to fluctuate below 1.0% for the remainder of the year. The BOK pencils in headline inflation of 0.7% for 2019 (April’s forecast: 1.1%). The Bank referenced the volatility in the Korean won, the U.S.-China trade spat and Japanese export restrictions as risks to the inflation outlook.

In its communiqué, the BOK struck a dovish chord, noting it would conduct monetary policy in a manner that will “ensure that the recovery of economic growth continues and consumer price inflation can be stabilized at the target level”. This insinuates further monetary policy easing is not out of question. In fact, many of our FocusEconomics panelists foresee further rate cuts ahead.

Nomura economists expect the Bank to deliver a cut in Q4, explaining:

“We now expect the BOK to deliver a 25bp rate cut again in H2 this year, most likely at the meeting on 17 October, as we believe the BOK will pause temporarily its easing cycle to assess the impact of today’s rate cut and fiscal supports from the FY19 supplementary budget (which we expect will be implemented in the coming months). However, we acknowledge the risk of a rate cut at the 30 August meeting, resulting in back-to-back rate cuts, in the case of the Fed turning more dovish (e.g., a 50bp rate cut by the Fed) or further downside pressure from external factors including the escalation of the China-US dispute.”

The next monetary policy meeting is set for 30 August.

FocusEconomics Consensus Forecast panelists are taking the Bank of Korea’s latest move into consideration and new forecasts will be published on 20 August.