Interest rate held but sign of cut in near futureKorea’s central bank maintained the country’s base interest rate at a record low 1.25 percent, stressing a positive outlook for global trade and signs of recovery for domestic demand.
But the 2-5 split vote by the monetary board raises the possibility of a rate cut in the first half of the year. Two members of the monetary policy board - Cho Dong-chul and Shin In-seok - voted for a 0.25 basis point cut at a meeting held Friday morning. In the last meeting in November, when the bank also froze the rate, only Cho voted against a steady rate.
The central bank said its hold of the 1.25 base rate was due to signs of recovery in the China-U.S. trade relationship and improvements in some indices about the domestic economy such as equipment investment and employment.
“Global financial markets have been generally stable in line mainly with progress in the U.S.-China trade negotiations,” the monetary policy board said in a statement.
“As it is expected that domestic economic growth will be moderate and it is forecast that inflationary pressure on the demand side will remain at a low level, the board will maintain its accommodative monetary policy stance.”
The rate freeze was largely expected by the market. According to a survey done by the Korea Financial Investment Association of 200 people in the finance industry, 99 percent expected a rate freeze.
Bank of Korea Gov. Lee Ju-yeol maintained a positive outlook on the country’s semiconductor industry, which the country is heavily reliant on.
“Multiple institutions estimate that demand for DRAM chips will exceed supply starting from the second quarter of this year,” Lee told the press. “We are cautiously optimistic that the outlook for the semiconductor sector for this year will remain positive.”
Analysts expect there might be rate cut in the first half of this year as the economy is in need for a greater push for recovery.
“The board is showing confidence now because the economic indexes support the outlook it made back in November, which is why we don’t expect any cut in the first quarter,” said Kim Sang-hoon, an analyst at Hi Investment & Securities. “However, going into the second quarter, a dwindling base effect and possible second phase negotiation between the United States and China on trade should be monitored carefully.”
Kiwoom Securities analyst Ahn Ye-ha also predicted a base rate cut in the second quarter.
“Even if the economy is showing improvement, the current outlook still falls short of the country’s potential growth rate,” she said. “Also, the fact that two board members voted for a cut indicates that there is still a need for a lower base rate.”
Some market analysts, on the other hand, discounted a base rate cut in the first half.
“At the briefing, Gov. Lee emphasized the pursuit of financial stability. It seems that he will focus on stabilizing the real estate market and household debt,” Kim Min-hyung from Mirae Asset Daewoo said.
Gov. Lee said there was hardly any possibility of Korea’s base rate approaching 0 percent.
“I don’t want to imagine the base rate going to 0 percent, and I believe it is right to have the base rate a little higher,” Lee said.
Lee maintained the bank’s outlook for economic growth in the low 2-percent range and inflation in the 1-percent range.
BY JIN EUN-SOO [email@example.com]
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