Bank of Korea cuts rates, keeps door open for more as economy loses steam

SEOUL (Reuters) - South Korea’s central bank cut its policy interest rate on Wednesday, as expected, and left the door open for further easing although a split vote on the move suggested the next reduction may not be imminent.

FILE PHOTO: A South Korea won note is seen in this illustration photo May 31, 2017. REUTERS/Thomas White/Illustration

The Bank of Korea's monetary policy board trimmed the base rate KROCRT=ECI by 25 basis points to 1.25% in a 5-2 vote, an indication the call for looser settings was not as broad as some analysts had expected.

Government bond prices fell across the board as investors tempered their rate cut views, with yields rising by around 5 basis points.

“There is still room for us to respond to changing financial and economic conditions,” BOK Governor Lee Ju-yeol told a news conference, adding global uncertainties remained high despite some signs of hope in the world economy.

He said Asia’s fourth-largest economy would likely miss the central bank’s latest growth forecast of 2.2% this year and that the central bank would release new projections when it updates its forecasts in November.

The rate cut follows a July easing and was in line with forecasts in a Reuters survey of 31 analysts. The new rate matches a record low set in late 2017.

The BOK’s move comes amid a wave of monetary easing globally, including by the U.S. Federal Reserve, as the world economy loses steam. The Fed is expected to deliver its third rate cut this year in months ahead.

Analysts said Governor Lee’s comments during the news conference were supportive of their expectations that another BOK rate cut was on the table, most likely in early 2020, unless the economy shows firmer signs of picking up.


However, analysts were surprised by two dissenting voters on the board, which suggested a more cautious outlook by the bank on further cuts than markets had been expecting.

“I expected there would be one dissenter, and so the result indicates the Bank of Korea may wait until it sees a further worsening in the economic indicators,” said Park Sung-woo, fixed-income analyst at DB Financial Investment.

South Korea’s economic growth has tumbled in recent quarters, hit by cooling global demand and the prolonged U.S.-China tariff war, due to its heavy reliance on the export of chips, cars and ships.

Global investment banks have slashed their 2019 economic growth forecasts for Asia’s fourth-largest economy to as low as 1.6%, compared with the central bank’s 2.2% projection from actual growth of 2.7% last year.

In its regular update on the global economic outlook released late on Tuesday, the International Monetary Fund slashed South Korea’s 2019 and 2020 economic growth forecasts by 0.6 of a percentage point each to 2.0% and 2.2%, respectively.

The economy grew just 1.9% in the first half of this year from a year earlier, down sharply from a 2.5% gain in the second half of last year and a 2.8% rise in the preceding six-month period, central bank data shows.

The historically robust economy now faces the serious threat of deflation as consumer prices in September posted their first annual decline in the country’s modern history.

Underlining these deflationary pressures, central bank data on Wednesday showed import prices fell in September for a fourth consecutive month from a year earlier, the longest losing streak since late 2016.

Signs of progress in U.S.-China trade negotiations have provided some cause for optimism in South Korea’s economy but uncertainties over the trade war are still high and exports have yet to show firm evidence of bottoming out.

The central bank next reviews policy on Nov. 29, which will be the last meeting for the year.

Additional reporting by Hayoung Choi; Editing by Sam Holmes