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(News Focus) Possibility of S. Korean rate cut looms after U.S. rate reduction

All News 11:13 October 31, 2019

By Byun Duk-kun

SEOUL, Oct. 31 (Yonhap) -- The U.S. Federal Reserve has again slashed its policy rate, boosting the chances of another rate cut in South Korea to bolster its slowing economy, analysts said Thursday.

At its latest Federal Open Market Committee meeting, which ended Wednesday (U.S. time), the Fed cut its base rate by 25 basis points to a range of between 1.50 percent and 1.75 percent.

"The Bank of Korea (BOK) too admits the effect of its monetary policy has weakened from before. It also acknowledges that it may not have much space for additional monetary policy maneuvers," said Shin Dong-soo, an analyst at Eugene Investment & Securities.

"In that respect, the Fed's rate cut may have expanded the room for monetary policy by the BOK," he added.

Yoon Myun-shik, senior deputy governor of Bank of Korea, speaks to reporters at the South Korean central bank's Seoul headquarters on Oct. 31, 2019. (Yonhap)

Yoon Myun-shik, senior deputy governor at the BOK, said the U.S. rate cut may play a positive role for the South Korean economy and its monetary policy.

"Basically, a monetary policy is based on factors such as local economic conditions, economic growth rate and financial stability, but the Fed's monetary policy is, of course, one of the factors that we must consider, and in that sense, the U.S. rate cut may help somewhat remove our concerns over capital outflow," Yoon told reporters.

Capital flight has been a major issue for South Korea, at least since its central bank slashed its key rate to 1.50 percent in July, widening the gap between its own rate and that of the U.S. to a then maximum 1 percentage point.

The U.S. Fed subsequently twice reduced its policy rate to narrow the gap, but the BOK again cut its base rate to the record low of 1.25 percent this month.

Still, many analysts here had anticipated an additional rate cut by the South Korean central bank even prior to the latest U.S. rate reduction.

"We believe the BOK will further reduce the base rate at least once next year regardless of U.S. rate decisions," Kyobo Securities analyst Baek Yoon-min said.

"A direct comparison between the U.S. and South Korea may not be easy, but the U.S.' economic conditions continue to remain sound while South Korea faces difficult conditions in all aspects, including exports," Baek added.

South Korea's exports have dropped for 10 consecutive months since December amid the prolonged trade dispute between the U.S. and China, which are the world's two largest economies and the biggest importers of South Korean products.

A graph of the trend in GDP growth (Yonhap)

The need to further help the local economy was highlighted last week when the BOK said the country's gross domestic product grew 0.4 percent from three months earlier in the third quarter, making the central bank's annual growth projection of 2.2 percent anything but reachable.

"There still remain uncertainties from the U.S.-China trade dispute, while other geopolitical risks, such as the South Korea-Japan trade dispute and the crisis in Hong Kong, also persist," Park Yang-su, head of the BOK's economic statistics department, said earlier.

Park said the local economy needs to grow by nearly 1 percent on-quarter in the fourth quarter just to meet a 2 percent on-year expansion target, a seemingly impossible feat.

The South Korean economy grew 1 percent on-quarter in the April-June period, but only because of a base effect created by an unexpected 0.4 percent contraction in the first quarter that marked the slowest growth in a decade.

Low inflation is also a major factor that has many anticipating another base rate reduction in the near future.

South Korea's consumer price increases stayed closer to 0 percent than 1 percent in recent months before plunging to an all-time low of minus 0.4 percent on-year growth last month.

Still, the U.S. rate cut will not automatically lead to an additional rate reduction by the BOK, the analysts noted.

"The country had preemptively lowered its base rate, and the BOK says it needs to first study the effect of its rate reductions," said Shin.

The BOK's deputy chief too said the latest U.S. rate decision may not play a too great role in his country's future monetary policy decisions.

"Because the direction of the Fed's monetary policy is not the only or a great factor we must consider, and because (a monetary policy) must be based on the consideration of all factors, I cannot say the U.S. rate cut will have a great impact on our rate decisions," Yoon said.


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