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Central banks rush to cut key rates
By Lee Kyung-min
By Lee Kyung-min
Many central banks have joined a global wave of key rate cuts as the world economy is losing growth momentum amid the escalating U.S.-China trade dispute.
These moves are putting the Bank of Korea (BOK) in a tight spot over whether it should follow suit in its next rate-setting meeting in July. BOK Governor Lee Ju-yeol Wednesday hinted at a possible rate reduction.
The BOK's shift to a dovish stance came after Federal Reserve Chairman Jerome Powell hinted at a rate cut on June 4, saying the U.S. central bank was “prepared to act” to help the country's 10-year economic expansion if the ongoing trade war continues with China, Mexico and other nations.
"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,” Powell said.
On June 3, the Reserve Bank of Australia (RBA) cut the key interest rate to a new record low of 1.25 percent, seeking to help turn around sluggish employment and stagnant wages and dispel inflation concerns.
The rate cut, which came almost three years after the last one, reflects the assessment that the jobless rate there was “unlikely to fall further.”
RBA Governor Philip Lowe said the rate-setting monetary policy board decided to “support employment growth and to provide greater confidence that inflation will be consistent with the medium-term target.”
Similarly, India's central bank on June 6 cut its interest rate to 5.75 percent, down 25 basis points from 6 percent, changing its stance to “accommodative” from “neutral” after its economy in the first three months of 2019 grew at its slowest pace in over four years.
Earlier on May 9, the central bank in the Philippines cut its key rate to 4.5 percent, down by 25 basis points, after the country's economy grew at its slowest pace in about four years.
The Reserve Bank of New Zealand also lowered its benchmark rate for the first time in two and a half years. It reduced its cash rate to a new record low of 1.5 percent on May 8, citing “below-target inflation and a souring economic outlook.”
Chile's central bank also cut its benchmark interest rate, June 8, to 2.5 percent, down by 50 basis points, bracing for a sharper economic slowdown because of the U.S.-China trade dispute.
When will BOK follow suit?
In response to a series of rate cuts by its counterparts abroad, BOK Governor Lee signaled a possible rate reduction in the coming months Wednesday, a dramatic shift from its earlier stance that it was not the time to lower the benchmark rate.
“The BOK will take necessary measures to comply with changes in the economic situation,” he said during the central bank's 69th anniversary event, Wednesday.
“The renewed U.S.-China trade dispute is discouraging world trade. Uncertainties in the global economy are mounting. Korea's economy depends heavily on the exports of certain industries, and a series of recent developments could impact Seoul and countries like it even further.”
Yun Chang-hyun, a business professor at the University of Seoul, said the BOK has few options, citing worse-than-expected economic data.
“The BOK will say it will carefully and comprehensively monitor ongoing developments in the financial sector and the economy at large, so as to maintain a policy that best helps keep the economy going,” he said.
“But it will have to lower the key rate in the latter half given the dreadful first-quarter contraction and continued weak data on jobs, business and consumer confidence.”