The Bank of Korea decided on Wednesday to cut its interest rate by 0.25 % to 1.25%, the lowest level in two years.
The central bank’s Monetary Policy Board lowered its key rate to 1.25% in June, 2016. But it raised the key rate by 0.25% in November 2017 and another 0.25% in November last year following the US Fed, which then attempted to normalize its monetary policy.
However, the BOK changed its policy stance to monetary easing in July this year, slashing the key rate by 0.25% as external conditions worsened, primarily due to the prolonged US-China trade deficit.
The second policy rate cut this year means that the Korean economy is under downward pressure.
“Going forward, the (Monetary Policy) Board expects domestic economic growth to fall below the July projection, owing chiefly to the continued US-China trade dispute and the heightened geopolitical risks,” the central bank said.
This remark meant that South Korea’s GDP growth rate this year would likely be lower than 2.2%.
In July, the central bank lowered South Korea’s economic growth forecast for this year down to 2.2% from the previous 2.5%.
The BOK said in a statement: “The pace of domestic economic growth has remained slow, as consumption growth has weakened, while the adjustment in construction investment and the sluggishness in exports and facilities investment have continued.
“Employment conditions have partially improved, with the increase in the number of persons employed having risen,” it added.
Employment numbers increased by 348,000 in September following a 452,000 increase in August.
Regarding consumer prices, which recorded a minus 0.4% in September, propelling arguments on possible deflation, the BOK dismissed the possibility of deflation.
It said: “Looking ahead, it is forecast that consumer price inflation will fall short of the path projected in July and fluctuate for some time at around the 0% level, and then run in the 1% range from next year. Core inflation will also gradually rise.”
BOK Governor Lee Ju-yeol told a press briefing that the central bank still has monetary policy room, signaling a further rate cut. But he dismissed the possibility of taking additional measures such as quantitive easing to boost the economy in the near future.
Some argue that lowering the interest rate does not work out well in boosting the economy, so more drastic measures like quantitive easing need to be taken.
“We still have room to respond to financial and economic situations if necessary. Therefore, additional policy measures are not in the process of being implemented,” Lee said. “However, we are conducting a study to review policy measures other than interest rates that can be used in case the country further reduces its policy leeway in the future.”