Mere hours after the US Federal Reserve hinted at an interest rate cut, Bank of Korea Gov. Lee Ju-yeol said Thursday that South Korea would take apt measures to deal with economic shifts, hinting at mirroring the Fed’s move.
The policy-setting Federal Open Market Committee on Wednesday left the key rate on hold in the 2.25-2.5 percent range, but added it “will act as appropriate to sustain the expansion,” since uncertainties of the rate outlook have increased. The Fed’s shift in tone comes amid an elongated US-China trade war, followed by US President Donald Trump’s latest push for a rate cut.
In his encounter with reporters at the BOK headquarters, Lee said that “the outcome of the FOMC meeting is more dovish than expected.”
“In the dot plot, eight out of 17 FOMC members projected a rate cut by the year-end, which means there is a higher chance of a US rate cut,” he added. The dot plot is a visual, yet anonymous, representation of where members think rates will go over the short, medium and long-term.
Lee also acknowledged the pressure surrounding the BOK’s current monetary policy, saying that the central bank will “respond with appropriate action” to progress in the US-China trade war and the semiconductor industry, which is one of Korea’s main export items.
“Fed Chair Jerome Powell said it is best to monitor the situation at the moment, due to uncertainties surrounding the US-China trade war, during his press conference held earlier,” Lee noted.
“We will also monitor the results of the US-China summit on the sidelines of the upcoming G-20 summit next week.”
The BOK has kept the policy rate frozen at 1.75 percent since raising it by 25 basis points in November last year, hoping the nation’s economy will recover in the second half of the year.
But with heightening trade conflict tensions continuing to weigh on the domestic economy through a slump in exports and business spending, Lee last week hinted at a rate cut for the first time in months, acknowledging that “uncertainties on our growth path have become greater.”
The BOK cut its 2019 growth outlook for the local economy to 2.5 percent from the 2.6 percent forecast in January. It is scheduled to hold its next rate-setting meeting in mid-July.
Meanwhile, the US Fed is projected to carry out a maximum of three potential rate cuts in the second half of the year, analysts noted, with the G-20 summit to act as a game changer.
“The expectations surrounding the market have already taken at least two rate cuts into account, so there is room for at least one more,” Meritz Securities analyst Yoon Yeo-sam said.
In this sense, the G-20 summit will determine the time frame for the rate cuts according to Kim Yu-mi, analyst at Kiwoom Securities.
“The FOMC is likely to cut rates next month as a preemptive move, and if the economic momentum weakens (following the G-20 meeting), then another cut is projected to follow around December,” she said.
The FOMC meeting comes after the introduction of new tariffs on $200 billion worth of Chinese imports and Trump’s claims that lower interest rates would help US companies, as a rise in rates would only encourage foreign investors to purchase US dollars -- which will further increase their clout.
By Jung Min-kyung (email@example.com