Further rate cut possible if downside risks expand: BOK
South Korea’s central bank said Thursday that it could consider further cuts in its base rate amid growing economic uncertainties, such as the trade tension with Japan.
“If the economic conditions worsen, (a rate cut) will of course have to be considered,” Bank of Korea Gov. Lee Ju-yeol told reporters.
When asked about the US Federal Reserve’s decision to cut the key interest rate Wednesday, Lee welcomed the much-anticipated move, but also expressed some disappointment.
“The rate cut was in line with earlier expectations, but Fed Chairman Jerome Powell’s remarks were not as dovish as expected,” Lee told reporters, adding that he believed the US would carry out further rate cuts this year.
Reflecting the slowing growth pace of the economy, the BOK last month slashed the benchmark rate by 25 basis points to 1.5 percent much earlier than expected. It also lowered the outlook for the country’s growth pace for this year to 2.2 percent, down 0.3 percentage point from its earlier suggestion.
“(The latest revision of the economic growth pace) did not sufficiently reflect (the impact of) Japan’s export curbs, and (further) monetary policy responses should be taken into account,” Lee said, claiming that the central bank still has “policy space” for additional measures.
Powell’s cautious stance on a further rate cut has put pressure on the BOK and its consideration of similar action as such a move would widen the interest rate gap between both two countries.
Earlier in the day, the BOK released an official statement echoing Lee’s remarks, addressing concerns stemming from mounting tension between Seoul and Tokyo. The Japanese government is poised to remove Korea from the whitelist of trusted trade partners on Friday. The Shinzo Abe administration has already applied tougher export restrictions on three key materials that are critical to the production of semiconductors and display panels, starting early July.
“In case external economic conditions worsen and macroeconomic downside risks expand, (we) may consider additional monetary policy measures,” said the report submitted to the National Assembly’s Finance Committee.
“We cannot underestimate the impact on the Korean economy, should Japan remove us from its whitelist,” the report added.
“(For the time being), the BOK will maintain its current policy direction, but an additional rate cut will depend on the impact of the (latest) rate cut and the pace of economic recovery.”
Asia’s fourth-largest economy saw its exports plunge to $46.1 billion last month, down 11 percent on-year, marking the eight consecutive month of decline since December, according to government data.
The country’s economy marked an on-quarter growth of 1.1 percent in April-June, following an unexpected 0.4 percent on-quarter contraction in January-March. The apparent rebound, however, was largely seen as attributable to the government’s increased fiscal spending.