BOK chief doesn’t rule out another rate cut

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BOK chief doesn’t rule out another rate cut

Bank of Korea Gov. Lee Ju-yeol hinted at the possibility of yet another rate cut if the economy fails to pick up. The comment came a day after the central bank’s monetary policy committee lowered the key interest rate to another all-time low of 1.5 percent to prevent the economy from further contracting due to the Middle East respiratory syndrome (MERS) outbreak.

Consumer spending, which had been a key contributor to the slow recovery of the Korean economy, suddenly froze with the MERS outbreak.

“It’s difficult to be optimistic over the Korean economic recovery, and therefore we will maintain a loose monetary policy,” said Lee during his keynote speech in celebration of the bank’s 65th anniversary. “The policy conditions could rapidly change, including the interest rate hike by the U.S. Federal Reserve, in the future, but I believe that we would need to exercise caution in adjusting our monetary policy in case the economic recovery happens to be weak.”

In other words, if MERS continues to negatively affect the nation’s economy, the BOK will likely refrain from tightening monetary policy by raising Korea’s interest rate, despite the possible impact of a rate increase by the U.S. Fed.

The central bank governor earlier carefully addressed questions regarding the tightening monetary policy by the U.S. central bank, saying he believes that even if the Fed raises its benchmark interest rate, the increase would be gradual.

He often has noted that Korea’s own monetary policy doesn’t necessarily have to immediately follow moves taken in the United States. He has expressed confidence that the local economy, which has $300 billion in foreign reserves and currency swap agreements with several countries, including China, can withstand a possible mass exodus of foreign investors once the Fed starts raising its interest rate.

During Friday’s speech, the governor talked about the positive influence the BOK’s easing of monetary policy had on the economy prior the MERS outbreak.

“Even with exports struggling, the domestic market has been improving, including consumer spending,” said Lee. “The huge easing of our monetary policy, including the rate cuts made since the second half of last year and the loans offered to small and midsize businesses, has contributed to improving the economy.”

The central bank has cut the key interest rate four times since August. The key interest rate was lowered from 2 percent in August to 1.5 percent on Thursday.

While most market experts were betting this week’s rate cut would be the last action that the Bank of Korea takes this year, some have speculated otherwise.

The latest to forecast another rate cut in 2015 was Daishin Securities.

“Many financial market participants consider the interest rate cut [on Thursday] to be the last [ for this year] and circumstances abroad and at home indicate that another rate cut won’t be easy,” said Park Hyung-joong, Daishin Securities’ analyst.

He cited the possible interest rate increase by the U.S. Fed and rising household debt as the primary reasons.

“However, although there are reasons that make it difficult for an additional rate cut, I believe that the rate cutting by the BOK isn’t over,” said Park. “We are standing by our previous projection that another cut will be made this year.”

He said that in the past, the direction of the Korean economy was closely related to the direction of the economy in the United States and therefore the monetary policy also headed in the same direction.

But today, the situation has changed. The analyst noted that the recovery of the U.S. economy no longer necessarily has a positive influence on the Korean economy, and the Korean economy’s recovery in the second half of the year has become uncertain.

The BOK governor also has hinted that in July, the central bank’s forecast for growth this year is likely to be lowered. In April, the BOK forecast this year’s growth to reach 3.1 percent. Many institutions have predicted economic growth below 3 percent.

“Under current economic conditions, there is no reason for Korea to follow the monetary policy of the United States,” said Park. “Korea’s monetary policy should now be aligned with China’s, which has become a bigger influence.”

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