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BOK likely to cut key rate to record low this week

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Analysts expect additional rate cut in 2020

By Park Jae-hyuk

The Bank of Korea (BOK) is expected to cut its key interest rate to a record-low 1.25 percent at Wednesday's monetary policy meeting, as concerns have grown over possible deflation and a global economic recession, analysts said Sunday.

"The BOK will announce its growth outlook in November, but it expects it will not be easy for the country to meet the central bank's previous outlook of 2.2 percent annual growth," Kiwoom Securities analyst Kim Yu-mi said. "It is therefore probable that the BOK may lower the key rate pre-emptively, before lowering its outlook."

After slashing the rate to 1.5 percent, down from 1.75 percent, in July, the central bank has since kept the rate unchanged. If it cuts the rate by 25 basis points this month, the nation's benchmark interest rate will go back to the record low, two years after it was normalized in November 2017.

The option of freezing the key rate would be difficult for the BOK, analysts said, citing the falling consumer price index that aroused fears of deflation, as well as U.S.-China trade tension that had heightened economic uncertainties and was weighing on the Korean economy.

As they said, the Korean economy is facing a growing number of warning signs.

According to the OECD, Korea's composite leading indicator (CLI) dropped by 0.03 percentage points to 98.82 in August, making the decline the longest at 27 consecutive months.

The CLI was designed to provide early signals of turning points in business cycles. If the indicator falls below 100, it signals that economic slowdown will continue for the next six to nine months.

Bloomberg data also showed 41 domestic and foreign institutions' outlook for Korea's economic growth in 2019 fell to 1.9 percent on average.

Bank of Korea Governor Lee Ju-yeol bangs the gavel at the beginning of a monetary policy meeting at the central bank in Seoul. / Yonhap
Bank of Korea Governor Lee Ju-yeol bangs the gavel at the beginning of a monetary policy meeting at the central bank in Seoul. / Yonhap

Against this backdrop, BOK Governor Lee Ju-yeol has hinted several times at a further rate cut.

"It may not be easy to meet the 2.2 percent growth target," Lee said during a National Assembly audit Oct. 8. "We've already signaled to the market that our monetary policy aims to support economic recovery."

The U.S. Federal Reserve's 25 basis point rate cut in September also gave the BOK room for an additional rate cut, because a larger gap between the two countries' key rates may cause an outflow of foreign capital from Korea.

Meanwhile, analysts expect the BOK will make another rate cut in 2020.

The Kiwoom analyst said her company expected an additional rate cut next year, because of tough domestic and global economic conditions.

NH Investment & Securities analyst Kang Seung-won said his company expected the central bank would continue to slash the key rate to 1 percent until the first quarter of next year.

The state-run think tanks also suggest the BOK maintain an aggressive monetary policy to cope with the downside risks and falling price index.

In a report given to Rep. Kim Song-sik of the minor opposition Bareunmirae Party ahead of the National Assembly audit, the Korea Development Institute (KDI) said the monetary policy required further examination, so that it would focus more on price stability.


Park Jae-hyuk pjh@koreatimes.co.kr


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