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Rate cut expected to boost stocks in short run

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Bank of Korea (BOK) Governor Lee Ju-yeol bangs a gavel during the Monetary Policy Board meeting at the central bank's headquarters in central Seoul, Thursday. The BOK cut the policy rate by 25 basis point to 1.5 percent on the day. / Yonhap
Bank of Korea (BOK) Governor Lee Ju-yeol bangs a gavel during the Monetary Policy Board meeting at the central bank's headquarters in central Seoul, Thursday. The BOK cut the policy rate by 25 basis point to 1.5 percent on the day. / Yonhap

KOSPI jumps 1.35% to close at 2,094.36

By Jhoo Dong-chan

Experts and analysts welcomed the central bank's Thursday decision to cut the key rate by 25 basis points to 1.5 percent, but the effect of the rate cut is expected to be limited.

Lee Chang-mok, managing director of NH Investment & Securities' Research Center Division, said the rate cut could positively influence Seoul stocks in the short run, but the impact is likely to be minimal.

"It could help push Seoul stocks upward in the short run since the central bank pre-emptively lowered the rate before the Fed," Lee said.

"However, the real problem here is the firms' earnings. Their first-half earnings are expected to suffer by a huge margin compared to a year ago. Due to their disappointing earnings, investors are now looking for less risky assets, such as gold bars and bonds. Under the circumstances, stocks are not likely to continue their upward trend throughout the year."

Samsung Securities researcher Moon Dong-yeol said the Bank of Korea (BOK) could cut the rate again by the end of this year, considering the nation's ever-worsening economic situation.

"The central bank pre-emptively cut the policy rate before the Fed. This indicates the rate cut isn't a one-time thing but could take place once more this year," Moon said.

"The BOK has confirmed its dovish stance that the economy is sluggish so it needs to stimulate it. The National Assembly is also expected to pass the supplementary budget bill in the second half of the year."

According to the Korea Exchange, the benchmark KOSPI closed at 2,094.36 on Friday, up 27.81 points, or 1.35 percent, from the previous session. The tech-heavy Kosdaq was also up 8.91 points, or 1.34 percent, to 674.06 on the day thanks to the BOK's rate cut.

A rate cut usually encourages investments, so many worry the BOK's decision could lead to a sudden housing market rally, but experts claim this is unlikely as long as the government's regulations remain intact.

"The nation's housing market has been suppressed by the government's strong measures to regulate housing loans. It is not easy for a real potential buyer to buy an apartment especially in the metropolitan area under the circumstances," an NH NonhHyup Bank mortgage loan division official said.

"I understand there is floating money worth more than 1,000 trillion won at the moment, but it won't be easy for them to jump into the market as long as actual potential buyers are barred by government regulations."

During a press conference after the Bank of Korea (BOK) Monetary Policy Board meeting, BOK Governor Lee Ju-yeol said the ongoing trade tension between Korea and Japan is part of the reasons behind the rate cut.

"The rate cut reflects the Japanese government's decision to restrict its exports to Korea. Considering the total trade volume between the two countries, the impact shouldn't be overlooked if the trade tension prolongs further than anticipated," he said.

The central bank estimated Korea's potential growth rate will be between 2.5 percent and 2.6 percent in 2019 and 2020.

Foreign agencies came up with even gloomier forecasts.

U.S. multinational investment bank 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.


Jhoo Dong-chan jhoo@koreatimes.co.kr


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