South Korea's central bank unexpectedly cut its policy interest rate for the first time in three years on Thursday (July 18), as a trade dispute with Japan among other pressures heightened risks for the already slowing economy.
The central bank estimated the local economy to grow 1.9 percent on-year in the first half and 2.4 percent in the second half. A deepening trade row with Japan may have forced BOK's hand, given the Korean economy is already struggling to navigate the Sino-U.S. tariff standoff.
The rate cut, the first since June 2016, underscores the need to help the economy deal with a series of headwinds including a trade tussle between the United States and China, and more recently, its own feud with Japan over the latter's export restrictions.
"After the rate cut which surprised the market, the speech may have improved the sentiment because it confirmed the central bank's pro-growth stance", said Gao Qi, FX strategist at Scotiabank.
The central bank says the Board believes the pace of global economic growth is continuing to slow, mainly due to the trade dispute between the USA and China.
Bank of Korea Governor Lee Ju-yeol told a news conference the central bank has room to respond to any changes in economic conditions, which analysts took as indicating another policy easing was on the table. The bank revised down this year's consumer price gain estimate to 0.7 percent from 1.1 percent.
Treasury bond futures jumped on expectations for another rate cut, although stock and currency traders shrugged off Thursday's rate decision. Adding to this, prices of semiconductors, a key export item for South Korea, has remained weak.
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In a survey conducted by Yonhap Infomax, the financial news arm of Yonhap News Agency, eight of the 13 experts polled expected the BOK to keep its policy rate intact in July.
Japan's export curbs was one factor to economic assessment. Gold prices hit fresh historic highs and debt prices their highest in three years with bets on revisit to the record-low interest rate territory.
"Various remarks from the governor today indicated another cut was possible soon, such as his refusing to deny that markets were pricing in another cut this year and his comment that the bank still has policy room to operate", said Park Seok-gil, economist at JPMorgan in Seoul.
Kim Sang-hoon, an analyst at HI Investment & Securities, echoed such a view, saying another rate cut by the BOK is possible before the end of the year given its preemptive action ahead of the Fed's move and its concerns over a slowdown in exports and capital spending by businesses.
South Korea's policy rate was already lower than that of the US, which now sits in a range of 2.25 percent to 2.5 percent.
"A de facto low ceiling can in fact vary, depending on what it is based on, for instance the possibility of a fund outflow".
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