South Korea’s central bank warned that economic growth would be weaker than forecast after cutting its policy rate for the second time this year as a global downturn pummels exports and weighs on prices.
The move comes amid a wave of rate cutting by central banks around the world to shore up growth and highlights the sense of urgency at the Bank of Korea (BOK) to prop up a sputtering economy, especially with consumer prices falling. The decision to lower the main policy rate to 1.25%, matching a previous record low, was forecast by 21 of 25 analysts surveyed by Bloomberg.
The bank said growth this year wouldn’t reach the 2.2% forecast it gave in July. Governor Lee Ju-yeol said he wanted to see data for the third quarter due next week before making a new projection, when asked at a news conference if the economy would expand less than 2% this year.
With a rate cut on Wednesday already priced into markets, attention focussed on whether the bank would signal further cuts to come and whether interest rates alone could keep the economy on track. Lee, who has warned that Korea cannot lower rates as much as other key economies can, said the BOK still has room to reduce rates if needed. He insisted that the bank wasn’t currently in need of unconventional measures to support growth and prices.
Still, offering a hint that steps like quantitative easing might have a place in the BOK’s policy tool kit in the future, he added that the bank was exploring options outside of rate cuts should its room for maneuver shrink.
For the time being, just cutting rates may prove increasingly difficult after two BOK board members voted against the rate cut. Lee stressed it was natural for dissent to arise among board members when uncertainties are high.
“What matters is what the majority opinion is,” Lee said. “Every board member needs to respect the opinion of the majority.”
Additional stimulus moves by the Federal Reserve and the European Central Bank have been followed this month by rate cuts in Australia, India, and Singapore. Judging by the pace and extent of the BOK’s cuts so far, it has been on the cautious side in taking rates lower as it remains wary of financial risks from low interest rates.
“The key question is when the BOK will cut again, and given the economic fundamentals are not looking good, markets should be prepared for another cut,” said Cho Yong-gu, a fixed-income strategist at Shinyoung Securities.