Money in Korea

Korea - Money

BOK cuts base rate in October on sluggish domestic growth

At its 16 October monetary policy meeting, the Bank of Korea (BOK) voted to cut the base rate by 0.25 percentage points to 1.25%, as had been widely expected by market analysts. The decision comes amid a dim outlook for the Korean economy and is the second cut this year. Interest rates are now at a joint-record low.

The Bank pointed to a wide number of factors behind the decision, including slow domestic growth, muted price pressures and difficult external conditions. Year-on-year exports contracted for the 10th consecutive month in September amid U.S.-China trade tensions, and the Bank now projects annual GDP growth to fall below its July estimate. Moreover, prices fell in September, driven lower by fuel and food prices, while the Bank predicts inflation to remain below its target rate of 2% next year. Meanwhile, volatile global financial markets and dovish sentiment from major central banks provided further reasons to cut rates.

The BOK remained dovish in its communiqué. It maintained that it would “conduct monetary policy so as to ensure that the recovery of economic growth continues and consumer price inflation can be stabilized at the target level”, and spoke of maintaining an “accommodative monetary policy stance”. This indicates further monetary easing is possible going forward. This is aligned with the consensus view of FocusEconomics panelists, a number of whom see further rate cuts in 2020.

This view is not unanimous, however, and some panelists see rates unchanged. For instance, economists at Nomura view a rate cut in 2020 as unlikely. They noted that “the need to see the impact of rate cuts already delivered will lead to the BOK staying on hold this year, while […] further ahead it will be data dependent as it tries to balance growth and inflation concerns with financial stability risks and limited policy space”.

The next monetary policy meeting is set for 29 November.

FocusEconomics Consensus Forecast panelists expect the Base rate to end 2020 at 1.14% and to end 2021 at 1.33%.