Expectations of BOK rate cut escalate

Bank of Korea Governor Lee Ju-yeol briefs the press after a session of the Monetary Policy Board in Seoul, Tuesday, which kept the February key rate unchanged at a record low of 1.5 percent for the eighth consecutive month. / Yonhap

By Kim Jae-won

The Bank of Korea (BOK) froze its key rate at 1.5 percent on Tuesday, but left open the possibility of cutting the benchmark rate as early as March, officials and analysts said.

The BOK held the benchmark rate for eight straight months since last July after delivering four rate cuts since 2014 to bolster growth in Asia’s fourth-largest economy.

BOK Governor Lee Ju-yeol said that the central bank’s monetary policy committee chose to wait and see how global financial turbulence unfolds, because it is hard to predict the direction of the global economy at this moment.

“We are doubtful of the effectiveness of rate cuts because offshore uncertainties are rising too much,” said Lee in a press conference after the decision. “But, side effects of rate cuts are expected.”

However, he hinted that the central bank might carry out another rate cut in the first half of the year as anticipated by many economists.

Lee said a member of the policy-setting committee has expressed his support for a rate cut.

“Ha Seong-keun, a member of the committee, expressed his opinion to cut the rate to 1.25 percent,” though the other six members agreed to freeze it, Lee told reporters.

Ha’s remarks in the meeting’s minutes will be available in two weeks.

This is the first time in eight months that a member of the committee has called for a rate cut. Since July 2005, the rate freeze has been supported unanimously by the committee members.

The latest rate freeze came amid a continued high level of volatility in financial markets around the world since January. Stocks have tumbled, forcing investors to move to safer assets, such as the U.S. dollar, Japanese yen and gold.

Economists said that the central bank may cut its rate by June, as the bank sees the economy waning.

“We expect the BOK to cut its rate in the first half, as it expressed a more negative forecast on the economy,” said Moon Hong-cheol, an analyst at Dongbu Securities.

BOK Governor Lee said the central bank will not follow the footsteps of its Japanese and eurozone counterparts which cut their rates to negative recently. He said the bank will decide its monetary policy based on the country’s own circumstances which he sees as better than those two regions.

He said that recovery is weakening in the U.S. and eurozone, while emerging markets including China are growing slowly. He said Korea’s exports are declining sharply and recovery in domestic demand is weakening amid low consumption.

Exports plunged 18.5 percent year-on-year in January, the sharpest decline in six years, according to customs data. Outbound shipments have dipped every single month since the start of last year.

The BOK chief said the low inflation rate did not warrant an immediate change in monetary policy because the bank aims for an inflation rate around 2 percent in the medium term. The growth in consumer prices slowed to a three-month low, last month gaining 0.8 percent from a year earlier.

The BOK’s monetary policy board insisted the local economy will continue to expand on domestic demand. The board predicted that the Korean economy will continue its recovery going forward, centering on domestic demand activities, though external economic conditions are fueling uncertainties.