Bank of Korea keeps interest rate steady, cuts growth goal

South Korea’s central bank left interest rate steady on Friday even as it trimmed growth and inflation projections, underlining a cautious view on the economy in the face of global risks and cementing market bets for more policy easing next year.

The Bank of Korea’s (BOK) policy board held the base rate steady at 1.25% having cut it twice in recent months, matching a unanimous prediction in a Reuters poll, but one of the seven board members voted for reduction.

The most liquid 3-year treasury bond futures extended gains after Governor Lee Ju-yeol’s news conference, while local stock prices and currency showed a muted reaction.

“The local economy will continue to show a trend similar to the current pace until the middle of next year and then will likely begin improving,” Lee told a news conference.

The central bank downgraded this year’s economic growth forecast to 2.0% from the previous 2.2% and next year’s to 2.3% from 2.5%. Inflation projection was also revised down to 0.4% for this year from the previous 0.7%.

“The governor said the momentum would be far from strong even when the economy begins recovering and that the recovery would start only from the middle of the next year,” said Cho Yong-gu, economist at Shinyoung Securities.

Cho said these cautious views underscored the high chances of a further rate cut in 2020, adding he was changing his forecast to a further cut in the rate next year from no change.

While predicting the rate would be left unchanged on Friday, 11 out of the 14 economists in the Reuters survey saw a cut in the rate next year to 1.0% or lower, which would be the lowest since it adopted the current policy system in 1999.

Heavily dependent on exports of computer chips, smartphones, cars and ships, Asia’s fourth-largest economy is headed for the worst growth in a decade even after two rate cuts and a big increase in government budget spending.

The central bank cut the policy rate in July and October by 25 basis points each time, but the bank had been given little chance of making another cut so soon as two of the seven policy board members had voted to keep it unchanged in October.

Earlier this month, the country’s most influential government think-tank called on the BOK to cut interest rates further while slashing its economic growth forecasts for this and next year to 2.0% and 2.3%, respectively.

Despite some signs of manufacturing activity beginning to stabilise and optimism that the US-China trade war would soon end, analysts said South korea’s economy would still require further policy support to build a solid recovery.

“We think that BOK’s easing cycle has further to run,” Alex Holmes, Asia economist at Capital Economics, said in a note.

“We expect the global economy to struggle for momentum over the coming quarters and that export demand will stay subdued.”

Meanwhile, South Korea and Japan have agreed to hold senior-level trade talks in December to discuss Tokyo’s export restrictions at the centre of a bitter dispute between the two countries, the South Korean trade ministry said on Friday.

The talks would include Japan’s tighter rules since July on the export of three high-tech materials to South korea and its removal of Seoul from its so-called “white list” of countries with fast-track trade status, the ministry said.

Seoul responded by taking Japan off its list of fast-track trade countries, deepening the trade dispute that has festered for months and hurt some of Asia’s biggest exporters. “We will pursue dialogue with an ultimate goal to make things like the white list or three items go back to the original state,” Lee Ho-hyun, a South korean senior trade ministry official, said at a news briefing.

The talks would take place in the third week of December in Tokyo, the ministry added.

The two countries agreed on Saturday to hold a summit next month in a major step towards improving relations strained by decades of bitterness over their wartime past. In a further sign of an easing of tensions, South korea has also agreed to stick to an intelligence-sharing deal with Japan.

Officials from both countries met on Thursday to discuss holding the senior-level trade dialogue, according to the South korean trade ministry.

The mood at the meeting on Thursday was more “friendly” than a similar meeting in July shortly after Tokyo imposed the export curbs, Lee added.  South Korea will idle up to a quarter of its coal-fired power plants between December and February to help limit air pollution, and the remaining plants should be enough to supply power over the winter, the country’s energy ministry said on Thursday.

Reuters