BOK faces dilemma over key rate

Bank of Korea Governor Lee Ju-yeol speaks about its rate freeze at a press conference in Seoul on Friday. Yonhap

By Park Hyong-ki

The Bank of Korea (BOK) will continue to face a dilemma on whether to cut its key interest rate amid "three lows" ― low growth, low inflation and low employment, analysts said.

The central bank is expected to consider lowering the rate to 1.5 percent from 1.75 percent should the country's weak economic outlook persist in the latter half, they said.

The views came after the central bank kept the benchmark interest rate at 1.75 percent Friday to maintain financial stability. The rate has been unchanged since December.

"The debate over a possible rate cut could continue if the economy remains weak in the second half of the year," said Oh Chang-sob, an analyst at Korea Investment & Securities.

BOK Governor Lee Ju-yeol said he was aware of suggestions the central bank should lower its key interest rate because of a contraction in the first quarter and the ongoing U.S.-China trade conflict.

But he reiterated that the central bank's monetary policy was already accommodative, and the time was not ripe to counter the slowdown with a rate cut.

One bank board member, Cho Dong-chul, voted for a 0.25 percentage point cut due to low inflation. Early this month, Cho, who is considered "dovish," raised concerns over inflation being "too low" for the economy.

BOK chief Lee said consumer prices have been weak on fiscal and welfare policies aimed at reducing the financial burdens on low- and middle-income earners.

"We will see private investment, exports and growth pick up in the latter half, buoyed by fiscal policies aimed at boosting the private sector," Lee said.

However, analysts say there is a limit to boosting growth through the finance ministry's supplementary budget and exports led largely by semiconductors.

"Given such limits, the last resort would be helping growth through a rate cut in the latter half," said Jeon Sang-yong, an analyst at DS Investment & Securities.

The central bank cut its 2019 growth forecast to 2.5 percent in April, from 2.6 percent. It also lowered its inflation projection from 1.4 percent to 1.1 percent this year.

The economy contracted 0.3 percent in the first quarter from the previous three months.

The International Monetary Fund (IMF), the OECD, Moody's Investors Service and the Korea Development Institute all suggested an accommodative monetary policy with fiscal expansion to support short-term growth this year.

The IMF has warned of headwinds, suggesting policymakers here should carry out a large extra budget and monetary easing in the face of slowing growth amid weakening exports.

It said a rate cut would not exacerbate the country's high household debt because policymakers have implemented strong macro-prudential measures.

The BOK raised its rate to 1.75 percent last November, following the U.S. Federal Reserve's rate hike.

It then indicated that it would focus on maintaining financial stability amid concerns over soaring household debt and real estate prices.

The central bank's next monetary policy meeting will be July 18.

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