Twist on the expectation of ‘July freezing & August reduction’… The first reduction in 3 years and a month
Potential growth rate also reduced to 2.5-2.6%
BOK says, “will try more communication with the market.” Toward further cut down during the year.
On Jul. 18, Monetary Policy Board of the Bank of Korea has reduced benchmark rate from 1.75% to 1.50% at the meeting held under the chairmanship of the chief Lee, Juyeol.
The benchmark rate cutdown is the first reduction in 3 years and a month since June 2016(0.25%p↓ to 1.25%). Ever since then, the benchmark rate had been raised two times in November 2017, and November 2018, 0.25% points each.
The benchmark rate reduction on Jul.18 is considered a shocking move against the expectations of the market.
The Bank of Korea has been expected to cut down the benchmark rate on Aug. 30. However, BOK’s negative forecast on the economic growth rate compared to that of earlier this year led to the sudden reduction.
BOK’s growth forecasts for 2019 last April was 2.5%. However, the amended growth forecast announced in the afternoon of Jul.18 was 2.2%, which is 0.3% points lower.
The reduction in both the benchmark rate and growth rate expectation is mainly caused by the minus growth(-0.4%) of the fiscal first quarter, followed by a disappointing rebound of the fiscal second quarter.
The chief Lee, Junyeol at the press conference, said, “It reflected poor exports and investments of the first half. Also, the upcoming situation is not too optimistic either.”
BOK has also lowered the expectation of the increased rate of plant and equipment investment as -5.5 from 0.4%, as well as that of construction investment increase rate(-3.2%→-3.3%).
The export and import were expected to increase as 2.7% and 1.6%, respectively earlier this year, yet the expectations this time has become 0.6% for the export increase and -0.5% for import.
Although the Current Account Balance will remain surplus, the expected surplus has decreased from 6.65 billion USD to 5.9 billion USD this year, and to 5.85 billion USD in the year after.
BOK also has re-estimated Potential Growth Rate of Korea in 2019-2020 to 2.5-2.6%. The rate has decreased compared to the that announced in 2017 for 2016-2020(2.8-2.9%). The expectation of Inflation Rate this year has also reduced from 1.1% to 0.7%.
BOK forecasts the semiconductor market will not recover until the end of this year at the earliest, or by the first half of next year due to the U.S./China trade dispute and ‘Huawei case.’
BOK explained that the grounds for the benchmark rate reduction is a decline in economic vitality and weak export, production, and investment. Only one person voted against the decision. (Lee, Ilhyeong a member of the board).
Governor Lee explained that the relatively significant amendments in the growth rate are due to environmental change. He said, “After the announcement in April, the situation has rapidly changed, especially in a recent couple of months.”
He specifically mentioned the U.S./China trade dispute, Policy change of Fed(Federal Reserve System), and the export restraints of Japan as ‘rapid changes in the recent 1 or 2 months’
He concerned, “If the export restraints are conducted and expanded, the impact on the export and even the economy of Korea as a whole shall not be taken lightly.”
About the U.S./China trade dispute, the head of the survey department of BOK, Lee, Hwanseok said, “The general view of the market sees it that will continue until the end of this year, and today’s cutdowns mean that we are on the similar stance.”
It appears to lighten the burden of BOK’s rate reduction as the U.S. Fed’s benchmark rate reduction is assured.
The BOK’s rate reduction this time is following the ‘monetary-fiscal policy coordination.’ Governor Lee, Jaeyeol said, “It is the common opinion of the central banks around the world that it requires to have an active fiscal policy and structural reform for productivity increase, to make monetary policy effective.”
There is a forecast that there may be another the benchmark rate reduction of 0.25% points at the end of the upcoming November under the current economic environment.
Regarding the forecast, Governor Lee, Jayeol said, “The rate reduction (today) made less space for the BOK’s future policy, but we still have enough capacity to counter the economic situations.”
However, his answer on the possibility of the actual rate reduction was, “We may have more communication with the market.”
Governor Lee, Jayeol also stated that the expectations of benchmark rate reduction have affected on the recent rebound sign of real estate prices in Gangnam Seoul.
He stressed, “The expectancy for the rate reduction may have influenced (the price) to a certain extent. The government’s intention on the stabilizing real estate market would be maintained consistently.”
Yonhap News (2019. 07.18.) 한은, 올해 성장률 전망 2.5→2.2%…”성장잠재력 저하”(종합)
MK, retrieved from https://www.mk.co.kr/news/economy/view/2019/07/538653/
