SEOUL (Yonhap) — South Korea’s central bank may trim its base rate either in June or July due largely to a slowdown inthe recovery pace of Asia’s fourth-largest economy, analysts said Saturday.
In a widely expected move, the Bank of Korea (BOK) left its benchmark interest rate unchanged at a record low of 1.75 percent for a second straight month in May, citing expectations for an economic recovery and soaring household debt.
While sustaining its view that “the economy will show a modest trend of recovery going forward,” the central bank said in a statement released on Friday that household lending at banks had increased “at a level substantially exceeding that of recent years.”
Confidence among domestic economic players is on the mend, despite a steady downturn in exports and fluctuations in indicators related to domestic demand, it added.
Despite its slightly upbeat but cautious stance, the central bank is expected to cut the rate next month because of a strong local currency and slowing exports, according to Shin Dong-joon, an analyst at Hana Daetoo Securities.
“Economic data may improve, but it is uncertain that such a modest recovery will be sustained,” the analyst said, adding that a bull run on the local stock market and a recovery pace in the property market has lost momentum.
BNP Paribas said that there would be at least one more quarter percentage point rate cut down the road.
“No surprises from the BOK, which, with the policy rate already at a record low of 1.75 percent, remains grudgingly reluctant to ease monetary policy further. Sluggish growth and serial inflation undershoots relative to target, however, continue to maintain pressure on the central bank to cut again and we continue to think that at least one more 25 basis point rate cut is simply a matter of time,” the global investment bank said in its report.
Another global investment bank projected a rate cut in July, citing sluggish data on domestic consumption and exports.
But some analysts say the BOK’s easing cycle has come to an end as the central bank’s overall assessment of the economy is seen positive.
“Due to lingering uncertainties at home and abroad, a door is still left open for an additional rate cut, but such a hope would diminish given the current economic situation,” said Park Jong-yeon, an analyst at NH Investment & Securities.
In a poll by Yonhap Infomax, the financial arm of Yonhap News Agency, seven out of 13 analysts projected an additional rate cut as early as June, citing the need to further boost economic growth.
The central bank has delivered three rate cuts by a total of 0.75 percentage point over the last 10-month period, most recently in March, to shore up growth. In its latest economic outlook updated on April 9, the BOK trimmed its annual growth forecast to 3.1 percent from 3.4 percent.
South Korea’s economy has been facing economic headwinds as the recovery remains weak despite policy efforts, including rate cuts.
In the first quarter, the Korean economy expanded 0.8 percent on-quarter, picking up from a 0.3 percent growth three months earlier. On-quarter growth, which reached 1.1 percent in the first quarter of last year, slowed to 0.5 percent in the second quarter and fell to 0.3 percent in the fourth quarter after slightly picking up to 0.8 percent in the third quarter.
