Experts split over course of BOK’s rate policy
Economic experts have been split over whether the Bank of Korea (BOK) will lower its key rate further, following a 25 basis points cut by the U.S. Federal Reserve, Oct. 30 (local time).
Some say the U.S. rate cut reduced the fear of foreign capital outflow from Asia’s fourth-largest economy, thereby giving the BOK more room to maneuver amid declining exports and weakening consumption over the past few months
However, others say more patience is required to accurately assess the “rapid” 50 basis points cut over the past three months.
The U.S. Fed lowered interest rates for the third time this year to a range of 1.5 percent to 1.75 percent, as the world’s largest economy continues to experience slowing growth amid its drawn-out trade feud with China and weak global trade expansion.
Park Chong-hoon, chief economist at SC First Bank, said the BOK would probably take a wait-and-see approach rather than resorting to an outright cut in the near future.
“The U.S’ 25 basis point cut is deemed a mid-cycle adjustment in an economic expansion, as indicated by Fed Chairman Jerome Powell who nonetheless strongly suggested the rates would hold steady for the foreseeable future. This is rather a mix of both hawkish and dovish stances requiring further data analysis,” Park said.
Also to be noted were some major changes in the post-meeting statements interpreted as the Fed’s hawkish turn.
The Fed removed a key clause — “act as appropriate to sustain the expansion” — and replaced it with “assess the appropriate rate path.”
The stance interpreted by some as tightening was offset by his comment on inflation that was taken as dovish.
“We just touched 2 percent core inflation to pick one measure. Just touched it for a few months and then we’ve fallen back. So I think we would need to see a really significant move up in inflation that’s persistent before we would consider raising rates to address inflation concerns,” Powell said.
Yun Chang-hyun, an economist at the University of Seoul, said Korea’s central bank will reach a decision that best helps the fast-deteriorating economy.
“The rate cut means that the central bank acknowledged that the economy is in bad shape. It has been only a couple of months since it cut the rate by 50 basis points, so it will need some time to see whether the expansionary policy has had the desired effect,” Yun said.
BOK Senior Deputy Governor Yoon Myun-shik said Thursday that the Fed rate cut gives the central bank more room as fear of a capital outflow has been reduced.
Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis Global Market Research, said the Fed rate cut pushes the BOK for one more cut by year end.
“On the issue of unconventional monetary policy, it is clearly too early,” she said.