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| Bank of Korea Gov. Lee Ju-yeol bangs a gavel to open a monthly rate-setting meeting at the central bank's headquarters in Seoul, Thursday. / Yonhap |
By Choi Kyong-ae
A rate cut option will be the last resort this year for the struggling Korean economy if the central bank's past rate cuts and the government's extra spending prove ineffective, analysts said Thursday.
The Bank of Korea (BOK) kept its key interest rate unchanged at a record low of 1.50 percent, Thursday, after four rate cuts since August last year as it still gauges the effect of former rate cuts and the supplementary budget on Asia's fourth-biggest economy.
"China's recent devaluation of its currency may have an impact on Korean exporters' competitiveness and result in massive capital outflows. We will make a monetary decision depending on the movement of the yuan," BOK Governor Lee Ju-yeol said in a press conference.
The governor picked three major risks to Korea's open economy in the second half, saying external risks are more threatening than ever.
"The three risks are increased volatility in international financial markets, possible capital outflow from Korea and other emerging markets, and an economic slowdown in China," Lee said.
The governor expressed concerns about a capital flight from Korea once the U.S. begins to raise rates as early as September. But the capital outflow will be limited due to solid fundamentals and sizable foreign currency reserves, he said.
Foreigners sold Korean stocks worth 208 trillion won this year through Wednesday, according to the Korea Exchange.
Analysts see growing uncertainties this week following China's sudden currency moves.
"China devalued its currency three times this week, pulling down Korean stocks and pushing down the won's value. Exports fell each month through July this year. Korea will be more vulnerable to other external factors such as an imminent rate hike in the U.S. later this year," KDB Daewoo Securities analyst Yoon Yeo-sam said.
If exports do not rebound and the government's 12 trillion won ($10 billion) supplementary budget doesn't work, there may be no other option but to cut the base rate, he said.
In the January-July period, exports fell 4.9 percent year-on-year to $315.3 billion, according to BOK data.
Meanwhile, domestic and foreign brokerages expect a policy rate cut of another 25 basis points to 1.25 percent in the fourth quarter due to "higher uncertainty" over the country's growth outlook. In July, the BOK cut its growth outlook to 2.8 percent this year from its April forecast of 3.1 percent.
"We interpret higher uncertainty as a downside risk to growth outlook. The combined impact of China's foreign-exchange policy change and the Federal Reserve's lift-off in December is large enough to force the BOK to downgrade its growth, especially exports, outlook markedly," Nomura analyst Kwon Young-sun said.
BNP Paribas analyst Mark Walton said the short-run impact of the yuan devaluation appears beneficial to Korean exporters with the won weakening more than the yen. This is unlikely to last, however.
Given recent quarterly growth trends, the BOK's growth forecast seems "still too aggressive. So further easing is likely," he said.
HSBC economist Joseph Incalcaterra said the BOK will likely feel considerable pressure to support growth, especially since recent comments by the finance minister suggest that the government is targeting growth of around 3 percent. He forecast a 25 basis point cut in September.
