South Korea Cuts Key Rate by 25 Bps to 1.25%

The Bank of Korea lowered its policy rate by 25 basis points to its lowest level in two years of 1.25 percent in a 5-2 vote. This was the second rate cut in three months, amid mounting deflationary pressures and a slowdown in the economy, with consumption growth weakening and sluggishness in exports and facilities investment persisting. The bank added that growth this year is expected to fall below the 2.2 percent projection made in July, amid the prolonged US-China trade dispute and the heightened geopolitical risks. Policymakers left the door open for further easing although a split vote on the latest move suggested the next reduction may not be imminent.
Bank of Korea l Rida Husna | rida@tradingeconomics.com 10/16/2019 9:52:00 AM
Excerpts from the statement by the Bank of Korea:

The board considers that the pace of global economic growth has continued to slow as trade has contracted. The global financial markets have shown high levels of volatility, affected mainly by the uncertainties concerning the US-China trade dispute and the sluggishness of economic indicators in major countries. Looking ahead, the Board sees global economic growth and the global financial markets as likely to be affected by factors such as the degree of the spread of trade protectionism, the changes in the monetary policies of major countries, and geopolitical risks.

The board judges that the pace of domestic economic growth has remained slow, as consumption growth has weakened, while the adjustment in construction investment and the sluggishness in exports and facilities investment have continued. Employment conditions have partially improved, with the increase in the number of persons employed having risen. Going forward the Board expects domestic economic growth to fall below the July projection, owing chiefly to the continued US-China trade dispute and the heightened geopolitical risks.

Consumer price inflation recorded a negative rate, in consequence mainly of the declines in the prices of petroleum products, agricultural, livestock and fisheries products, and public services. Core inflation (with food and energy product prices excluded from the CPI) has been at the mid-0 percent range, and the rate of inflation expected by the general public has fallen to the upper-1 percent level. Looking ahead, it is forecast that consumer price inflation will fall short of the path projected in July and fluctuate for some time at around the 0 percent level, and then run in the 1 percent range from next year. Core inflation will also gradually rise.

In the domestic financial markets, long-term market interest rates and stock prices have risen and the Korean won-US dollar exchange rate has fallen, with major price variables fluctuating considerably due to movements in the global financial markets. The rate of increase in household lending has continued to slow. Housing prices have remained steady overall but have risen in Seoul and its surrounding areas.

Looking ahead, the board will conduct monetary policy so as to ensure that the recovery of economic growth continues and consumer price inflation can be stabilized at the target level over a medium-term horizon, while paying attention to financial stability. As it is expected that domestic economic growth will be moderate and it is forecast that inflationary pressures on the demand side will remain at a low level, the Board will maintain its accommodative monetary policy stance. In this process it will judge whether to adjust the degree of monetary policy accommodation, while observing any changes in macroeconomic and financial stability conditions and the effects of the two Base Rate cuts. It will also carefully monitor the US-China trade dispute, any changes in the economies and monetary policies of major countries, the trend of increase in household debt, and geopolitical risks.

South Korea Cuts Key Rate by 25 Bps to 1.25%