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The Bank of Korea left its key interest rate unchanged Friday, opting to preserve policy room after two rate cuts this year to support an economy hurt by global trade tensions.
South Korea’s central bank kept the seven-day repurchase rate at 1.25% in its last decision of the year, as expected by all 27 analysts surveyed by Bloomberg. The central bank said growth would be around 2% for 2019 and slightly above that in 2020, having previously forecast growth of 2.2% for 2019 and 2.5% for 2020.
The BOK said in a statement after the decision that it will maintain its accommodative policy stance, and monitor the need to adjust the degree of policy accommodation. The central bank said it will consider how factors such as the U.S-China trade deal, geopolitics, and household debt growth affect the domestic economy and financial stability.
Central banks across the globe have lowered interest rates this year to tackle slowing growth and inflation. With interest rates now at, or near, record-low levels in many countries, Australia and New Zealand were among those to pause this month to weigh the effects of stimulus against potential risks.
“The BOK will probably wait and watch at least until March,” said Kim Jin-myoung, an economist at Hanwha Investment & Securities. “Things the BOK will watch are how the bolstering of its accommodative stance this year filters through and how external uncertainties play out.”
South Korea’s economy is on course for the slowest expansion in a decade this year with economists’ consensus at 1.9%, and next year doesn’t look much better. Even though most economists believe growth will be better than this year, many attribute it to a base effect as opposed to genuine improvement.
Exports are headed for a 12th monthly decline and inflation has stayed at or below zero for the last few months, far below the 2% target. Industrial output fell more than expected in October from the previous month. On a positive note, consumer confidence has turned optimistic for the first time since April, and chip inventory is falling.
Next Step
With Friday’s hold decision, central bank watchers’ focus will now turn to if, and when, the BOK will resume easing. Governor Lee said in October the bank still had some policy room, while refusing to specify how low the interest rate could go. He also said the bank was studying “unconventional” policy tools, but made it clear it was too early to consider implementing them.
South Korea’s economy growing at a pace below its estimated potential of 2.5%-2.6% justifies more rate cuts, but the BOK is wary of financial risks such as an overheating of the property market or rapid household debt gains. A majority of economists surveyed on long-term projections expect the benchmark rate to remain at 1.25% or to be lowered once more. A few expect an additional cut to 0.75%, or even a hike.
Although the worst for South Korea may be over, “the likelihood of sub-2% growth in 2019, coupled with still-low inflation pressure, is likely to prompt the BOK to cut rates once again in the first quarter of 2020,” Barclays (LON:BARC) PLC analysts including Angela Hsieh wrote this week.
(Updates to add commments from BOK policy statement)
