BOK tipped to cut 7-day repo rate

Major foreign investment banks expect Korea’s central bank to make another rate cut in September due to slumping exports hurt by the euro zone debt crisis and slowing inflationary pressure, a report showed yesterday.

The Bank of Korea is forecast to lower the benchmark seven-day repo rate next Thursday by a quarter of a percentage point to 2.75 percent in what would be the second rate cut this year, according to the report by the Korea Center for International Finance.

The BOK froze the rate last month after delivering a surprise rate cut in July in an effort to shield the local economy from the bitter impact of the euro zone debt crisis.

The projection came as the prolonged travails in Europe, coupled with China’s slowing economy, have already dented Korea’s exports amid easing pressure on inflation.

HSBC said the BOK is likely to cut the borrowing cost this month in a bid to help boost sluggish domestic demand. Nomura said the nation’s exports may contract for the first time in three years this year, warranting rate cuts down the road.

Faltering exports and sputtering domestic demand are raising prospects that the domestic economy will grow less than the BOK’s full-year estimate of 3 percent this year.

Exports, which account for about 50 percent of the economy, are losing steam. The country’s overseas shipments fell 6.2 percent on-year in August, leading their combined value to post a 1.5 percent on-year decline during the first eight months. Imports also dropped 9.8 percent last month from the previous year.

Easing price pressure is likely to give BOK policy makers further room to take action this month, experts say.

Consumer prices grew 1.2 percent on-year in August, slowing from a 1.5 percent on-year expansion the previous month and marking the slowest growth in more than 12 years, according to the statistics agency.

The growth of headline inflation remained in the 1 percent range for the second straight month in August, running below the BOK’s 2010-12 inflation target band of 2-4 percent.

Some analysts said that a rate cut may be the only card available for Korea to boost economic growth as the government strongly opposes drawing up a supplementary budget.

Yonhap