South Korea Unexpectedly Cuts Key Rate by 25 Bps to 1.5%


The Bank of Korea unexpectedly lowered its base rate by 25 basis points to 1.5 percent on July 18th 2019. This was the first adjustment in benchmark rate since November last year and the bank's first rate cut in three years, amid efforts to spur economic growth on the back rising global uncertainties following trade dispute with Japan and tariff war between US and China.

Policymakers also revised lower 2019 GDP growth outlook to 2.2 percent from an earlier estimate of 2.5 percent, mentioning weak demand at home and abroad and a delayed recovery in the global IT sector. In the first half of the year, the economy is expected to grow by 1.9 percent and by 2.4 percent in the second half. Meanwhile, 2019 inflation rate is estimated to be at 0.7 percent, below an earlier projection of 1.1 percent.

Excerpts from the statement by the Bank of Korea:

The board sees global economic growth and the global financial markets as likely to be affected by factors such as the degree of the spread of trade protectionism, the changes in the monetary policies of major countries, and geopolitical risks.

The board judges that the pace of domestic economic growth has slowed as construction investment has continued undergoing an adjustment and the slowdowns in exports and facilities investment have deepened, although consumption has continued to grow moderately. Employment conditions have partially improved, with the increase in the number of persons employed having risen. With respect to future domestic economic growth, the Board expects that the adjustment in construction investment will continue and exports and facilities investment will recover later than originally expected, although consumption will continue to grow. GDP is forecast to grow at the lower-2 percent level this year, below the April forecast (2.5 percent).

Consumer price inflation has remained low at the mid- to upper-0 percent level, in consequence mainly of the continued decline in petroleum product prices. Core inflation (with food and energy product prices excluded from the CPI) has been at the mid- to upper-0 percent range, and the rate of inflation expected by the general public has been at the low-2 percent level. Looking ahead, it is forecast that consumer price inflation will fall short of the path projected in April and fluctuate for some time below 1 percent and then run at the low- to mid-1 percent level from next year. Core inflation will also gradually rise.

The volatility of price variables in the domestic financial markets has increased. Long-term market interest rates have fallen significantly, in line mainly with concerns about economic slowdowns at home and abroad. Stock prices and the Korean won-US dollar exchange rate have fluctuated considerably, mainly affected by the US-China trade dispute and Japan’s export restrictions. The rate of increase in household lending has continued to slow, while housing prices have continued their downtrend.

Looking ahead, the board will conduct monetary policy so as to ensure that the recovery of economic growth continues and consumer price inflation can be stabilized at the target level over a medium-term horizon, while paying attention to financial stability. As it is expected that domestic economic growth will be moderate and it is forecast that inflationary pressures on the demand side will remain at a low level, the board will maintain its accommodative monetary policy stance. In this process it will carefully monitor developments such as the US-China trade dispute, Japan’s export restrictions, any changes in the economies and monetary policies of major countries, the trend of increase in household debt, and geopolitical risks, while examining their effects on domestic growth and inflation.

South Korea Unexpectedly Cuts Key Rate by 25 Bps to 1.5%


Bank of Korea l Rida Husna | rida@tradingeconomics.com
7/18/2019 5:19:22 AM