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South Korea cuts interest rates again as economic woes grow

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South Korea's central bank cut its policy interest rate for the second time in three months on Wednesday, as expected, to support a slowing economy and address mounting deflationary pressures.

[SEOUL] South Korea's central bank cut its key interest rate for the second time this year in a widely expected move to tackle weakness in economic growth and prices.

The decision to lower the seven-day repurchase rate to 1.25 per cent, matching a previous record low, was forecast by 21 of 25 analysts surveyed by Bloomberg. The rest expected the bank to leave the rate unchanged.

Amid a wave of rate cutting by central banks around the world to shore up growth, the Bank of Korea's move highlights the sense of urgency within the board to offer further support for the economy, especially with consumer prices falling. Governor Lee Ju-yeol has repeatedly said the BOK has some policy room to act while expressing doubts over whether the bank's growth forecast can be achieved.

"The BOK has no reason to wait on cutting as the data justify an immediate cut, policy makers are clearly prioritizing growth, and the trade war looks far from over," Kathleen Oh, an economist for Bank of America Merrill Lynch, wrote in a report before the decision.

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Recent data have continued to paint a gloomy picture of the 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.

While a truce between China and the US may offer some relief to global trade, previous developments in the tariff tussle have shown tensions can quickly flare up at any time.

Central banks have been adding stimulus as the effects of a global slowdown seep into economies around the world, with Australia, India, and Singapore among those to have taken action this month. Judging by the pace and extent of cuts so far, the BOK has been on the cautious side in taking rates lower as it remains wary of financial risks from too-low interest rates.

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

RATE PATH

For central bank watchers the key question is whether Lee will hint at further moves to come or the likely pace of future cuts by the BOK.

According to a Bloomberg survey conducted Oct 1-8, about half of the 25 respondents expect the policy rate to remain unchanged at 1.25 per cent throughout 2020, while a slightly smaller group forecast a further lowering of rates to 1 per cent or 0.75 per cent. 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, having projected 2.2 per cent growth and 0.7 per cent inflation for this year in July. Signals of a significant downgrade by the BOK governor on Wednesday may prompt analysts to bring forward their projected rate cut timing, or amend their calls for no change.

Still, reasons for a cautious approach remain. 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. Lee has said South Korea's lower bound on rates needs to be higher than those for key currency economies, without specifying a figure.

"The rate falling below 1 per cent next year is a real possibility," said Park Jeong-woo, an economist at Korea Investment & Securities. "There's not much to be hopeful about in Korea's economy at the moment, be it consumption, investment or exports. If the BOK is going to act, the timing better be right."

BLOOMBERG