Another rate cut likely to boost ailing economy

The central bank is likely to cut the key interest rate in October as the local economy is losing steam on faltering exports and sluggish domestic demand, a poll showed yesterday.

Fifteen of 18 analysts predicted the Bank of Korea will lower the benchmark seven-day repo rate by a quarter percentage point to 2.75 percent on Thursday, according to the survey by Yonhap Infomax, the financial news arm of Yonhap News Agency.

Trumping market expectations for a rate cut, the BOK froze the key rate in September following its surprise rate reduction in July, in an apparent bid to save ammunition to brace for a potential worsening of economic conditions.

Analysts said a rate cut is likely to come this month as a spate of economic data point to weakening economic growth and a stronger local currency is feared to hurt already-faltering exports. Inflation data also give enough room for a rate cut, they added.

“There is a high chance the BOK will cut the rate this week in a bid to shore up weakening growth and help curb the sharp gains of the local currency,” said Lee Sung-kwon, a senior economist at Shinhan Investment.

“Given the upcoming presidential election in December, the timing of a rate cut would be plausible in October.”

The economy is likely to grow in the 2 percent range this year on the protracted euro zone debt crisis, lower than the BOK’s original 3 percent growth estimate. The central bank also plans to unveil its revised 2012 growth outlook on the day of the rate setting.

The BOK said in its recent monetary policy report that it will manage the key rate to help the local economy recover to its long-term growth trend while making efforts to keep price stability.

A set of economic data pointed to weakening economic growth and the country’s consumer inflation remained subdued, giving room for the BOK to take action, analysts said. Industrial output posted on-month fell for the third straight month in August and exports fell on-year for the third straight month in September.

Despite the economic slowdown, the local currency has appreciated more than 3.5 percent to the dollar this year, raising concern that a stronger won may crimp already faltering exports.

The annual growth of consumer prices picked up to 2 percent in September from 1.2 percent in August but remained in the comfort zone of the BOK’s 2 percent to 4 percent inflation target band.

A handful of analysts bet on a BOK rate freeze this month, however, on prospects that unconventional stimulus steps by major central banks may help soothe downside risks to growth.

“A rate cut may do little to bolster real economic activities while the necessity to preserve policy room remains intact,” said Jung Sung-wook, an analyst at KTB Securities. “The BOK will likely be cautious about cutting the rate although it will say it is open to taking action if necessary.”

Central banks in the U.S., the euro zone and Japan are pausing to assess the impact of their quantitative easing steps last month due on their economies.

According to the BOK’s September minutes, one policy maker claimed a rate cut might do little to boost consumption and investment due to the prolonged global economic slowdown.

The poll showed that if the BOK conducts a rate cut in October, any additional rate reduction is unlikely to come this year, given that hectic political events would make it difficult for the government and the central bank to change economic and monetary policies.

“If a further deterioration of economic conditions is not evident, the BOK cannot help but be prudent in cutting the rate,” said Shin Dong-su, an economist at NH Investment & Securities.

Yonhap