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| The Bank of Korea headquarters in Seoul / Yonhap |
By Jhoo Dong-chan
The Bank of Korea (BOK) is likely to lower its policy rate once more this year to revitalize the nation's sluggish economy, analysts said Wednesday.
According to the Ministry of Economy and Finance, Korea's exports declined 11 percent in July compared to the previous month, continuing its downward trend for eight consecutive months since December.
The BOK lowered its key rate to 1.5 percent, July 18, a 25 basis points cut from the previous 1.75 percent to pre-emptively counter any fallout from the renewed U.S.-China trade dispute and Tokyo's trade pressure against Seoul, but the economy has yet to show any signs of recovery.
Adding fuel to the fire, the yield on the benchmark 10-year U.S. Treasury bonds fell below the 1.6 percent mark last week, less than the return on two-year bonds for the first time since June 2007.
This "yield curve inversion," which refers to a reversal where returns on short-term bonds are higher than long-term bonds, is often considered a prelude to an economic recession.
Experts said the central bank is likely to cut its key rate again this year and at least twice by the first half of next year.
"Downward pressure on Korea's economy is strengthening due to the renewed U.S.-China trade row and Tokyo's decision to remove Korea from its trade whitelist," said IBK Securities researcher Kim Ji-na.
"The government is seeking to expand its spending to boost the economy, but the effect seems to be limited. The only viable option is the BOK's rate cut."
Korea Development Bank Future Strategy Research Institute researcher Lee Yoo-na agreed.
"The nation's key rate should be around 0.9 percent in the second quarter of the year," Lee said.
The BOK's next monetary policy committee meeting is scheduled to be held on Aug. 30.
According to forecasts by 42 domestic and overseas financial institutions compiled by Bloomberg, Korea's economy is expected to grow 2 percent this year, down from 2.1 percent in July.
This is considerably lower than the government's own prediction made last month of 2.4 to 2.5 percent.
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