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| Bank of Korea Governor Lee Ju-yeol |
The Bank of Korea (BOK) is coming under growing pressure to lower its key interest rate, following the unexpected dovish stance from the U.S. Federal Reserve, according to financial market analysts Thursday.
On Tuesday (local time), Federal Reserve Chairman Jerome Powell said the U.S. central bank was "prepared to act" to help the country's 10-year economic expansion if President Trump's ongoing trade war continues with China, Mexico and other nations.
"We do not know how or when these issues will be resolved," Powell said. "We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective."
His dovish remarks have cornered the BOK, with Korean financial market watchers increasingly expecting the central bank's rate-setting monetary policy board will lower the rate to 1.5 percent from 1.75 percent in the third quarter.
The assessment reflects growing concerns that the Korean economy will have no momentum for a rebound in the latter half, further compounded by the recent current account deficit.
Due in large part to falling exports, Korea posted a $660 million (777 billion won) deficit in April, the first on a monthly basis in seven years, following the last one amid the eurozone-triggered crisis.
The country's gross domestic product (GDP) contracted 0.4 percent in the first quarter of 2019 from a quarter earlier, due to a continued fall in investment and semiconductor exports.
The worse-than-expected performance resulted from sluggish exports amid the escalating U.S.-China trade dispute and reduced investment in the face of worsening business conditions following "anti-business" policies such as rapid minimum wage hikes.
Statistics Korea data released June 4 showed Korea's headline inflation rate stood at 0.7 percent in May, remaining below 1 percent for five consecutive months due to weak consumer sentiment and an oil price drop.
The bigger problem is that core inflation ― excluding volatile food and energy prices ― has remained below 1 percent for three consecutive months which economists say shows consumption will remain stagnant.
"The BOK has little option," said Sung Tae-yoon, an economist at Yonsei University.
"The financial market developments are increasingly pointing to the need to lower the key base rate. And the Fed chairman's recent remarks further pressure the BOK to go ahead with the rate cut. All major economic indicators have been weak, and the prospect is bleaker."
Data on jobs and exports have been and will continue indicating how the country's economy will further shrink down the road, he said, adding the interest rate of three-year government bonds, the yardstick of the market rate, is lower than the benchmark rate, which points to a recession.
The interest rate of three-year government bonds stands at 1.59 percent, 0.16 percentage points lower than 1.75, the key base rate.
"The only defense against the rate cut despite such woeful domestic economic conditions has been the U.S. Fed's hawkish stance, and now that it's set to change, the BOK has no other option," the economist said.
The central bank is the only entity that can help buoy the economy via accommodative policy.
"Soon after the foreign exchange market stabilizes, the rate will be cut," he said. "Even though the rate cut could heat up the property market that has largely cooled off following anti-speculation measures since last September, little inflationary pressure combined with other economic conditions well warrants the rate cut."
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