BOK makes surprise 2nd rate cut to boost growth

The Bank of Korea slashed the base interest rate for the second consecutive time Thursday, amid heightened uncertainties and slow growth. The cut surprised the market as the local currency has weakened against the dollar in recent weeks.

The Bank of Korea’s monetary policy board trimmed the base rate by 25 basis points, bringing it down to 3 percent. Four of the other six monetary policy board members, not including BOK Gov. Rhee Chang-yong, agreed to the rate cut, while the remaining two members suggested maintaining the rate at 3.25 percent, according to Rhee.

“There have been many changes since the previous base rate cut in October,” Rhee said at a press conference held at the bank's headquarters, shortly after the rate-setting decision. “Uncertainties about the economy and inflation have escalated in accordance with the course of the new US government’s economic policy."

“(The board) decided it is appropriate to deliver another rate cut to ease the growth risk of downward pressure on the economy,” Rhee said, explaining the bank's model shows a 25-basis-point rate cut will increase the economic growth rate by 0.07 percentage points.

Thursday's decision follows another 25-basis-point rate cut in October, which signaled the central bank’s pivot from the years of aggressive monetary policy. It was also the first time the BOK carried out an interest rate cut two times in a row since the streak of cuts delivered during the 2008-2009 global financial crisis.

The market had largely expected the BOK to freeze the benchmark rate due to concerns about the depreciation of the local currency. With Thursday’s decision, the Korea-US rate gap now stands at 1.75 percent.

The Korean won has been losing its value against the US dollar in recent weeks, as the greenback gained value with Trump's election victory. The value of the local currency against the dollar has fluctuated at around 1,400 won, nearly 30 won weaker than earlier this month.

Rhee said the currency volatility was at a “manageable” level, citing the sufficiency of the country’s foreign reserve.

“There are many ways to control the situation,” Rhee said, taking the central bank’s currency swap deal with the National Pension Service as an example.

“Fortunately, the ‘Trump trade’ seems to have eased off,” Rhee said. “The depreciation of the Korean won has not been extreme compared to other currencies.”

Rhee further explained that the level of inflation and the rise in household debt have remained stable in recent weeks, enabling the rate reduction.

With the rate cut, the BOK also reduced its economic growth estimate for this year and next year by 0.2 percentage points to 2.2 percent and 1.9 percent, respectively, citing a slowdown in export growth.

The estimate for next year is below the country's potential growth rate of 2 percent, and also lower than the 2 percent projection given by the Korea Development Institute and the International Monetary Fund.

Market watchers interpreted the rate cut to be a "dovish" move, as the bank's tone indicated the possibility of more rate cuts to come, unlike in October, when it cut the rate but suggested it could tighten policy again.

"Considering the November cut showed the BOK would operate a growth-focused monetary policy, ditching its cautious stance, the central bank is likely to deliver another rate cut in January," said analyst Ahn Ye-ha from Kiwoom Securities.

"Unlike the hawkish cut in October, the November cut is very dovish," analyst Kim Myung-shin from iM Securities said.

"The BOK could pick up the pace in its rate cut cycle until the first half of next year, perhaps bringing it down to 2.25 percent by the end of 2025. If the economy remains sluggish, the rate could be reduced to 2 percent."