Bank of Korea cuts interest rate as growth slows amid trade risks

Seoul

THE Bank of Korea (BOK) unexpectedly cut its benchmark interest rate as it slashed economic growth and inflation forecasts, joining a growing number of central banks acting to shore up their economies.

The BOK cut the seven-day repurchase rate to 1.5 per cent from 1.75 per cent. It now expects the economy to grow 2.2 per cent this year, versus 2.5 per cent projected in April, and inflation to rise 0.7 per cent, versus 1.1 per cent previously.

With the benchmark rate now only a quarter percentage point above a record low, and financial stability still a concern, BOK governor Lee Ju-yeol said the central bank still has room to act again - but not much.

"The BOK will probably take a breather in August," said Park Chong-hoon, an economist at Standard Chartered Bank in Seoul. "But the very dovish statement from Lee today makes it necessary to stay open to the idea of further cuts in October and November. The worries about the tensions with Japan and other data may serve as headwinds for the economy."

The BOK's first rate cut since 2016 reflects urgency among policymakers, who face growing pressure as the nation's export-dependent economy slows and other central banks cut rates or signal they will soon.

Regional central banks from Australia to India have cut interest rates this year as global risks worsen. Bank Indonesia has also cut its benchmark rate by 25 basis points after six hikes last year.

"Bank of Korea's rate cut reflects a broader policy-easing wave across Asia," said Chua Hak Bin, an economist at Maybank Kim Eng Research in Singapore. "The tide has turned and more rate cuts are coming as growth slows. The US-China trade war is disrupting tech supply chains and Korea is a key node in that chain. Japan's export controls will worsen the disruption to tech supply chains."

The US-China trade war, China's own economic slowdown and a slump in the semiconductor sector have sent Korean exports tumbling for seven straight months. Growing tensions with Japan have further dimmed the outlook.

Mr Lee cited the friction with Japan as one of the factors in the downgraded growth forecast. "If Japan's export restrictions against South Korea become a reality and even broaden, the impact on our economy, including exports, wouldn't be small," he cautioned.

The BOK raised rates in November, joining its Asian peers in pushing borrowing costs higher as the Federal Reserve's rate-hike cycle pressured currencies and drew money out of the region. Eight months later, global monetary policy has shifted course as the trade war has dragged on.

Other factors in that hike were record household debt and elevated property prices. After the policy meeting in late-May, Mr Lee stressed that the central bank must consider financial stability as well as economic growth, saying household debt remained "very high" by any measure.

On Thursday, he said the rate cut marked a shift in priority. "The need to support economic recovery has become bigger," he said.

South Korean bond markets are suggesting the central bank will follow up Thursday's unexpected interest-rate cut with at least one more amid slowing economic growth and a simmering trade dispute with Japan.

The nation's three-year yield fell to 1.35 per cent after the decision, putting it well below the new benchmark rate of 1.5 per cent. The BOK lowered its seven-day repurchase rate from 1.75 per cent, while trimming its forecasts for economic growth and inflation.

"Yields are falling after the BOK cut its rate, which implies the economy is in a grave situation," said Lee Mi-seon, an analyst at Hana Financial Investment in Seoul. "Should the sluggish trend continue, the BOK may deliver another cut within the year."

Three-year yields may fall to as low as 1.25 per cent if there are more rate cuts to come, analysts said.

Korea's money markets are also signalling the prospect of lower rates. Traders are pricing in another 25 basis-point rate cut in around the next six months, with a good chance of another during the following year.

Korean bonds have rallied in recent months, with three-year yields falling from as high as 1.84 per cent in March, as slowing growth has hurt the nation's semiconductor industry and the ratcheting up of a trade row with Japan spurred demand for the safety of the nation's debt. BLOOMBERG