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Options mulled by central bank

After the Fed cut rates, local monetary policy makers on the fence

Nov 01,2019
The U.S. Federal Reserve’s decision to cut its benchmark interest rate by a quarter point could help the Korean economy, but its impact could be limited in terms of local monetary policy, according to a senior official of the Bank of Korea.

Yoon Myun-shik, senior deputy governor at the central bank, said on Thursday the U.S. rate cut to the 1.5 percent to 1.75 percent range would help ease worries over possible capital flight to the United States.

“Globally, [the decision] will help sustain growth and have positive influence on Korean economy to some degree,” Yoon said. “It could ease growing concerns in the markets for capital outflow.”

Since Korea’s key interest rate stood at an all-time low of 1.25 percent, some worried that the gap between the base rates in the two countries could prompt some investors to pull the money from the Korean markets and move it to the United States.

In terms of Korea’s monetary policy, Yoon said that the move “won’t have a big impact,” a comment interpreted by some analysts as a signal that rates will remain the same.

“In measuring the need for a further rate cut, the Bank of Korea indicated that it needs time to see how the recent two rounds of rate cuts work,” said Shin Dong-soo, analyst at Eugene Investment & Securities.

The Bank of Korea trimmed its benchmark interest rate from 1.5 percent to 1.25 percent earlier this month, only three months after the last cut to support a flagging economy. The last time the rate was that low was in 2016.

At the time, governor Lee Ju-yeol mentioned that the bank will take a cautious approach given that it had already used the monetary policy weapon twice in a relatively short time.

In the latest monetary policy meeting, the Fed also appears to be opting for a pause after finishing three planned rate reductions this year.

The statement notably did not say the Fed would “act as appropriate to sustain the expansion,” a phrase commonly used by officials as they move toward lowering the key rate to stimulate the economy.

The Fed, instead, said it will “continue to monitor implications of incoming information for the economic outlook.”

Still, some market analysts see that a further cut is possible next year as Korea faces a wide range of headwinds, including weak exports and investment.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]


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