BOK likely to freeze key rate amid downturn

Central bank expected to cut 2019 outlook to around 2%

By Lee Min-hyung

The Bank of Korea (BOK) is likely to decide to keep its key interest rate unchanged at 1.25 percent during this year's final rate-setting meeting Friday, in an apparent signal that the central bank will take a wait-and-see approach before cutting the rate further to boost the sagging economy, experts and analysts said Tuesday.

“The BOK will likely maintain the interest rate during the Friday monetary policy committee meeting, as it already cut the rate in October and expressed the need to see how the recent decision affects the market,” said Eugene Investment & Securities analyst Shin Dong-soo.

On Oct. 16, the BOK slashed the base rate to an all-time low of 1.25 percent amid growing economic uncertainty and little sign of recovery in the local economy.

The outlook for the rate freeze is in line with the worsening outlook for GDP growth here. Earlier last year, the BOK expected the economy to grow by 2.9 percent this year, but it curtailed the figure to around 2.2 percent in July.

But BOK Governor Lee Ju-yeol said in September it appeared it would be tough for the local economy to grow at the estimated level, further indicating that the nation's annual GDP growth may fall below the 2 percent mark this year.

Market experts said the economy is likely to make a slight rebound next year, as the local economy faced major setbacks this year. Additionally, some external risk factors, which came as a huge burden for growth here, are expected to be slowly cleared away next year.

“My view is that there is room for the GDP growth to top 2 percent next year by nudging up from this year's outstandingly low growth rate,” Yonsei University economist Sung Tae-yoon said.

“Despite the slight rebound, the public will not be able to notice a change in their lives as no drastic growth is expected for the time being,” he said.

The expert pointed out poor earnings from major chipmakers, such as Samsung Electronics and SK hynix, were one of the crucial drivers to drive down local economic growth. Korea is heavily reliant on the semiconductor industry, with the two companies accounting for about 25 percent of the total market capitalization in the local stock market.

He also expects the BOK to slash its key interest rate next year, as the local economy will remain stuck in the doldrums of low growth next year, despite recovery in some part of major industries.

“As of now, it appears the BOK will consider playing the card of cutting the rate sometime next year,” he said. “The BOK as well as government authorities need to comprehensively analyze recent economic policies and revise some of them that weighted on the economy.”

Lee Jun-sang, an economics professor at Sungkyunkwan University, concurred that the BOK was likely to slash the key interest rate next year.

“It will come as a burden for the government to further slash the rate, but it looks likely that the BOK is taking the step in consideration of the sluggish growth here,” he said.

“The BOK should have raised the rate about five to six years ago when the economic condition was better,” he said. “The central bank would have had more flexibility in managing the rate now if it had done so back then.”