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BOK Governor Lee Ju-yeol |
The BOK, which is under growing pressure to cut its key rate to beef up sagging exports and sluggish domestic demand, has only a matter of months to cut the key rate again before the U.S. raises interest rates, they said.
U.S. Federal Reserve Chairwoman Janet Yellen said last week she was confident that rates would rise this year, with the world's largest economy gradually recovering from an early-2015 slump.
Therefore, the Bank of Korea (BOK) had only a limited time to cut the benchmark interest rate to stimulate growth, the analysts said.
"Once the Fed begins to increase rates, the BOK will have to start to raise rates as well," said Hyundai Futures foreign-exchange analyst Lee Dae-ho.
"Exports are still deteriorating this month and consumer spending remains weak, weighing down the country's gross domestic product (GDP) growth.
"Given this, the BOK will possibly cut its rate in either June or July."
At a meeting with economics professors and heads of research centers at BOK headquarters in central Seoul Tuesday morning, BOK Governor Lee Ju-yeol expressed his concerns about increased uncertainties resulting from a weaker yen, deteriorating exports and slowing growth in China.
"Given that Korea's dependency on exports in GDP growth reaches 40 percent, much higher than 10 percent in major advanced countries, declines in exports will have a grave impact on the (Korean) economy," Lee said.
The governor said the BOK would strengthen its monitoring of capital flow and other volatility factors in international financial markets. At the Asia Development Bank annual meeting in Azerbaijan early this month, he said the BOK might cut rates depending on market conditions even if the U.S. raised rates, according to the BOK.
Analysts interpreted Lee's comments as a strong signal that the central bank could cut the base rate as early as June or July. The rate stands at 1.75 percent, a record low.
"We believe that structural (aging population and household debt burden) and cyclical (higher housing costs and lower nominal wages) factors will limit actual personal consumption, despite the improved housing and stock markets (which have helped support the consumer confidence index)," Hong Kong-based Nomura analyst Kwon Young-son, said in a research note.
Nomura expected the BOK to make one more 25 basis point rate cut to 1.5 percent in June because the bank expected "incoming data such as May exports to deteriorate due to weaker foreign demand and a strong won against trading partners," Kwon said.
Exports fell to $133.6 billion in the January-March period, down 2.9 percent from $137.5 billion a year earlier. Exports were still falling last month because of declining demand in China and the weaker yen, according to BOK.
The BOK and the International Monetary Fund recently revised down their growth outlook for Korea this year to 3.1 percent. The finance ministry is widely expected to cut its 3.8 percent growth forecast next month. Korea's economy grew 3.3 percent last year.