By Choi Kyong-ae
The Bank of Korea (BOK) is likely to cut its base rate in the first quarter of next year due to downside risks for growth after the bank kept its rate steady at 2 percent, analysts said Thursday.
BOK governor Lee Ju-yeol told a press briefing that it seemed inevitable that the central bank would have to revise its economic growth forecast for 2015 due to weakness in the eurozone, the slowdown in China, as well as sluggish domestic spending.
“I think it will be difficult for the central bank to stick to the existing growth forecast of 3.9 percent for the year 2015 given changes over the past two months with the economy,” Lee said.
On Thursday, the BOK kept the base rate at 2 percent ― a four-year low ― for the second consecutive month after cutting the rate in August and again in October.
The governor called worries that the country may slide into a deflationary phase “a bit excessive.” He expected inflation to remain weak for now because of falling oil prices and the slowing down of price increases for manufacturing goods.
He said the bank’s monetary policy committee would take a closer look at changes in monetary policies in major countries, external risk factors, soaring household debts and capital flows to make a rate decision next year.
In October, the bank cut its growth and inflation forecasts for the year because of worse-than-expected corporate earnings in the second and third quarters. It revised its growth forecast for this year to 3.5 percent from 3.8 percent, while cutting its inflation forecast to 1.4 percent from 1.9 percent.
It also trimmed its growth outlook for next year to 3.9 percent from 4 percent.
“In addition to external uncertainties, consumer sentiment in Korea has yet to improve and boost the economy,” the governor said. “We are planning to announce revised outlook figures next month after taking domestic and overseas factors into account.”
Analysts said the bank clearly acknowledged downside risks to growth and inflation, but Lee disagreed with the argument that the BOK needed to make a pre-emptive rate cut to counter deflation risks.
Nomura Securities analyst Kwon Young-sun said in a research note, “Although the BOK is between a rock and a hard place, it must eventually cut rates to stave off the various downside risks to the economy.”
Most brokerage research centers expect the bank to cut the rate by 0.25 percent to 1.75 percent in the first quarter.
In a research note released on Dec. 4, Standard Chartered Bank expected the BOK to cut the rate by a 0.25 percent to 1.75 percent in January and to 1.5 percent in April.