The Bank of Korea has slashed its policy rate by 0.25% to 1.50%, citing a slowing economy hammered by worsening external conditions. It also lowered its growth forecast for this year by a large margin – down to 2.2% from the previous 2.5%.

Even assuming no worse is to come, the latest prediction is 0.5% lower than last year’s GDP growth rate of 2.7%.

BOK Governor Lee Ju-yeol told a press briefing the reason for the cut was that he anticipated weaker-than-anticipated economic growth and inflation.

Indicators are all bad

On the potential impact of Japan’s export restrictions on the Korean economy, Lee said: “Considering the size of trade between Korea and Japan, and industry and business links, if export restrictions on Korea become a reality and expand further, we cannot say that its impact on our economy is small.”

As for further rate cuts, Lee was downbeat. “The BOK has some policy room as a one-time rate cut does not bring the policy rate close to the bottom limit immediately,” he said. “Korea is not a key currency country, so the bottom limit of policy rate should be clearly higher than that of advanced countries. In this regard, it would be be difficult to say that we do have enough room for policy.”

On his downward revision of the growth forecast, Lee said: “Since we worked on the economic outlook in April, there have been many changes in economic conditions surrounding the Korean economy, especially in external conditions. It mainly reflects the fact that exports and investment were slower than expected during the first half of the year and that future conditions are less optimistic.”

The BOK forecast that consumer prices will rise only 0.7% this year, much lower than the 1.5% rise in the previous year. Facility investment is forecast to fall 5.5% following last year’s 2.2% decline, due to uncertainties stemming from sluggish IT sector business and US-China trade disputes.

The number of employed is expected to increase by 200,000 this year due to increasing jobs in the service sector, but sluggish manufacturing and construction is expected to curb the job recovery.

Dark days ahead

Looking ahead, the BOK estimated the potential national growth rate at 2.5-2.6% for 2019-2020. That is well below the rate for 2016-2020 – estimated at 2.7-2.8%.

“The pace of the decline in the productive population has been steeper than expected, leading to a faster fall in the potential growth rate,” a BOK official told Asia Times.