SEOUL (Reuters) - South Korea’s central bank delivered a surprise interest rate cut on Thursday, and shaved this year’s growth forecast to the lowest in a decade, as a brewing dispute with Japan piled more pressure on the trade-dependent economy.
The Bank of Korea is not alone in adopting easier monetary policy, taking into account the dovish stance of global central banks and deteriorating economic conditions. Asia’s fourth-largest economy has stuttered in the past few quarters due to slowing demand and rising risks from the U.S.-China trade war.
Bank of Korea Governor Lee Ju-yeol told a news conference the central bank has room to respond to any changes in economic conditions, which analysts took as indicating another policy easing was on the table.
The BOK cut the base rate KROCRT=ECI by 25 basis points to 1.50% - the first reduction in three years and lowest since November - sooner than analysts had expected. A Reuters poll had predicted a move at the Aug. 30 meeting.
“Various remarks from the governor today indicated another cut was possible soon, such as his refusing to deny that markets were pricing in another cut this year and his comment that the bank still has policy room to operate,” said Park Seok-gil, economist at JPMorgan in Seoul.
Treasury bond futures jumped on expectations for another rate cut, although stock and currency traders shrugged off Thursday’s rate decision.
The central bank followed the rate cut by lowering this year’s economic growth forecast to 2.2%, just three months after it cut the projection to 2.5% from 2.6%. It also trimmed its inflation estimate to 0.7% from 1.1% previously, which was already below its 2% target.
“The policy board decided to lower the interest rate to support the economic recovery as both the growth and inflation trends were weaker than previously thought,” the governor said.
“Our economic assessment reflected Japan’s imposition of export restrictions as they will have considerable effects on our economy,” he added, referring to Japan’s curbs on exports to South Korea of key materials for chip and display production.
Lee emphasized the government needed to maintain strict measures aimed at containing housing prices while monetary policy was focused on risks from slowing economic growth.
Korean bond prices had already penciled in a rate cut or two in the near term especially since the central bank chief and the finance minister both suggested the time for policy easing was near.
Indonesia’s central bank is also expected to begin an easing cycle with a rate cut later on Thursday, ahead of an anticipated Federal Reserve reduction of U.S. rates at the end of July.
The BOK has come under more pressure to cut rates after first-quarter GDP and inflation fell short of expectations and the U.S.-China tariff dispute remains unresolved.
Early this month, South Korea’s economy was dealt an additional blow as Japan announced plans to tighten restrictions on exports of materials for making chips and smartphone displays to its smaller neighbor over a diplomatic row.
Analysts say it is too early to estimate the damage but the curbs could affect South Korea’s economy at least by hurting profits at the country’s computer chip and smartphone makers as well as hitting sentiment for consumption and investment.
Global investment banks have downgraded their forecasts for South Korea’s 2019 economic growth, with some expecting the pace to slow below 2% from 2.7% set last year.
South Korea’s economy surprisingly contracted in the first quarter from the previous three-month period, while annual inflation has stayed below its 2% target for the past seven successive months.
Additonal reporting by Hayoung Choi, Yuna Park, Sangmi Cha; Editing by Jacqueline Wong