SEOUL (BLOOMBERG) – Bank of Korea Governor Lee Ju-yeol insisted that Korea’s economy was already passing through its most painful moment after the central bank cut its growth forecasts on Friday (Nov 29), but kept its policy unchanged.
“Cautiously speaking, the economy appears to be passing through the bottom,” Lee said in a press conference. “Forecasts that global uncertainties will ease and the tech business situation will improve from the middle of next year are prevalent.”
Lee’s guarded optimism that a gradual rebound will emerge as the semiconductor sector regains strength is unlikely to curb expectations that the BOK will have to lower rates further to prop up growth in a slowing economy.
The call by one board member for a rate cut at the latest meeting and the dropping of wording that the bank would monitor the impact of previous easing both suggest further action is likely in the pipeline next year, economists said.
“His remarks do little to upend the market expectation for at least one cut next year,” said Park Sung-woo, an analyst at DB Financial Investment. “Even though he struck an optimistic tone about a recovery next year, the growth forecast itself doesn’t seem very optimistic.”
South Korea’s central bank kept the seven-day repurchase rate at 1.25 per cent in its last decision of the year, as expected by all 27 analysts surveyed by Bloomberg.
Speaking after the decision, Lee said the economy would expand by 2 per cent in 2019 and 2.3 per cent in 2020, both 0.2 percentage point lower than the previous forecast. Both projections assume an easing of US-China trade tensions that have battered South Korea’s export-dependent economy.
The won declined 0.1 per cent to 1,180.00 against the US dollar after Lee’s briefing, while the yield on three-year government bonds slipped 4 basis points to 1.39 per cent.
NEXT STEP
Central banks across the globe have lowered interest rates this year to tackle slowing growth and inflation. With interest rates now at, or near, record-low levels in many countries, Australia and New Zealand were among those to pause this month to weigh the effects of stimulus against potential risks.
“The BOK will probably wait and watch at least until March,” said Kim Jin-myoung, an economist at Hanwha Investment & Securities. “Things the BOK will watch are how the bolstering of its accommodative stance this year filters through and how external uncertainties play out.”
South Korea’s economy is on course for the slowest expansion in a decade this year with economists’ consensus below the BOK’s at 1.9 per cent, and next year doesn’t look much better. Even though most economists believe growth will improve in 2020, many attribute it to a base effect rather than a genuine improvement.
Exports are headed for a 12th monthly decline and inflation has stayed at or below zero for the last few months, far below the bank’s 2 per cent target. Industrial output fell more than expected in October from the previous month. On a positive note, consumer confidence has turned optimistic for the first time since April, and chip inventory is falling.
A further lowering of rates next year would take the BOK closer to the limits of policy effectiveness without resorting to non-conventional tools. Lee said that while the bank was studying unconventional policy tools broadly, it wasn’t considering specific steps as it can still respond with interest rates.