Economists see earlier rate cut by Bank of Korea as risks rise

THE Bank of Korea (BOK) will cut its benchmark interest rate earlier than previously expected, a Bloomberg survey shows, reflecting growing concerns over the outlook for economic growth.

The seven-day repurchase rate, currently at 3.5 per cent, will probably be lowered to 3.25 per cent during the last three months of this year, according to the latest median estimates by private economists. That’s one quarter earlier than last month’s survey.

The BOK is widely seen as having reached its terminal rate last month when it executed a quarter-percentage point hike, the latest of its 18-month tightening cycle. Two board members having disagreed with the move suggests the central bank will hold when it meets on Feb 23.

“The Bank of Korea will start to consider economic growth ahead of inflation and proceed on with a mild rate cut by 4Q,” said Stephen Lee, chief economist at Meritz Securities. “External demand will be weighing on exports as well as facility investments, with high interest rates on construction and consumption.”

After contracting last quarter from the previous three months, the Korean economy is now grappling with record trade deficits, property-market downturns and plunging exports at the start of the year.

The BOK acknowledged last month that economic growth this year would be weaker than it had projected earlier. Economists surveyed by Bloomberg have also brought down their annual outlook for growth to 1.4 per cent from 1.6 per cent. Their inflation forecast for the year remains unchanged at 3.3 per cent. BLOOMBERG