BOK cuts growth outlook to 2% after freezing key rate

Bank of Korea Governor Lee Ju-yeol chairs a Monetary Policy Board meeting at the central bank in Seoul, Friday. / Yonhap

Governor Lee hints at another rate cut next year

By Park Jae-hyuk

The Bank of Korea (BOK) lowered its 2019 economic growth outlook again ― to 2 percent ― during the last Monetary Policy Board meeting of the year, Friday. The key interest rate was frozen at 1.25 percent, as expected.

The latest growth forecast was the fourth downward revision this year.

Since the central bank cut its outlook to 2.6 percent in January from 2.7 percent in October 2018, it has continued to lower its outlook ― 2.5 percent in April, 2.2 percent in July and 2 percent in November.

If its forecast is right, it will be the Korean economy's lowest growth rate since 2009, when it was 0.8 percent during the global financial crisis.

“We lowered the growth outlook as the export and investment recoveries have been delayed further than expected and consumption growth has been sluggish,” BOK Governor Lee Ju-yeol told reporters after the meeting.

According to Statistics Korea, the nation's industrial output, retail sales and facility investment fell 0.4 percent, 0.5 percent and 0.8 percent, respectively, in October from a month earlier. This was the first time in eight months that all three key indicators of industrial activity have shown declines.

Against this backdrop, the Ministry of Economy and Finance predicts the nation's 2019 economic growth rate will be 2 percent to 2.1 percent.

Foreign investment banks, such as Bank of America (BoA) Merrill Lynch and Morgan Stanley, and private think tanks in Korea, including the Korea Economic Research Institute (KERI), forecast the country's GDP growth for this year will fall below 2 percent.

The central bank and the finance ministry, however, expect the nation's economy will rebound in 2020 and grow 2.3 percent.

“Economic growth next year is projected to be slightly higher than this year, due to the improvement in global trade and the semiconductor industry recovery,” Lee said.

Foreign investment banks expect the nation's 2020 economic growth rate will be 1.6 to 2.4 percent.

While BoA Merrill Lynch and Morgan Stanley expect 1.6 percent and 1.7 percent, respectively, JPMorgan Chase and Goldman Sachs produced relatively favorable outlooks of 2.3 percent and 2.1 percent, respectively.

Private think tanks here had gloomier outlooks. KERI and the LG Economic Research Institute expect 1.9 percent and 1.8 percent, respectively.

The BOK governor hinted that the central bank may cut the interest rate again next year.

“Considering the economic outlook for next year falls short of the potential growth rate, it is hard to say our economy's recovery momentum is strong,” he said. “The current 1.25 percent key rate still allows us room to counteract the slowdown with monetary policy.”

The BOK has tended to slash the key rate when the growth outlook falls short of the potential growth rate. If the central bank cuts the rate again next year, Korea will face the unprecedented 1 percent key rate.