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By Lee Kyung-min
The Bank of Korea (BOK) cut its key interest rate by 25 basis points to 1.5 percent Thursday, in a pre-emptive measure to tackle slowing growth amid growing uncertainties caused by a trade feud with Japan.
The central bank also revised its 2019 growth outlook to 2.2 percent from its previous forecast of 2.5 percent made in April.
The surprise rate reduction, the first since June 2016, came as Asia's fourth-largest economy faces growing downside risks due to a series of headwinds, such as a prolonged U.S.-China trade feud and Japan's export restrictions on Korea coupled with sluggish exports and investment here.
The central bank had kept the benchmark rate unchanged since November, when it hiked it by 25 basis points to 1.75 percent.
The BOK said there has been a growing need for a more accommodative stance following escalating trade disputes and a delayed recovery in the semiconductor sector.
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| . Bank of Korea Governor Lee Ju-yeol speaks during a press conference at the central bank's headquarters in Seoul, July 18. Courtesy of Bank of Korea |
Japan supplies up to 90 percent of the key resource materials worldwide and Korea makes about 60 percent of the world's chips.
"The outcome of the U.S.-China trade dispute, which continues to remain uncertain, and the fresh one between Korea and Japan are posing major risks to the country's economic growth," BOK Governor Lee Ju-yeol said at a press conference in Seoul.
"We therefore judged that the need to support economic recovery has substantially increased since we last made a forecast in April."
The BOK said it is carefully monitoring the possible spread of global trade protectionism, changes in the monetary policies of major countries and other geopolitical risks.
Factored into the BOK rate cut were remarks made by U.S. Federal Reserve Chairman Jerome Powell whose notable dovish turn has fueled market anticipation of a cut of at least 25 basis points at the upcoming Federal Open Market Committee (FOMC) meeting scheduled for July 31.
On June 4, Powell hinted at a rate cut saying the U.S. central bank was "prepared to act" if the ongoing trade wars with China and other nations continue.
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The current account is forecast to record a surplus of $59 billion (69 trillion won) in 2019 and $58.5 billion in 2020.
The central bank estimated Korea's potential growth rate will be between 2.5 and 2.6 percent in 2019 and 2020.
Global investment banks and credit ratings agencies have already reduced their forecasts for Korea's growth over the last few weeks.
Some organizations predicted the rate will fall below 2 percent, a far bleaker forecast than the finance ministry's outlook of between a range of 2.4 percent and 2.5 percent.
Morgan Stanley sees the Korean economy growing 1.8 percent in 2019. ING Group and Nomura Securities also lowered their growth rate projections to 1.5 percent and 1.8 percent, respectively.
Credit rating agencies ― Fitch, Moody's and Standard & Poor's ― lowered their forecasts for Korea's growth to between 2 percent and 2.1 percent.
Sung Tae-yoon, an economist at Yonsei University, said the country will continue to experience a prolonged slowdown.
"The outlook downgrade and the key rate cut were well-warranted by the worse-than-expected slowdown in investment and exports. If the trade dispute with Japan escalates, the BOK may consider another rate cut within this year," he said.
