S. Korea CB trims rates, more cuts seen next year

SEOUL (Reuters): The Bank of Korea cut interest rates as well as growth forecasts on Thursday, and although predicting a recovery ahead, its cautious view on the economy prompted many analysts to bet on another cut early next year.

Bond prices fell as investors took the widely-expected decision as a chance to cash in on recent gains, but losses were curbed by a broad perception that the global economy would take a while longer to show a major recovery.

 The Bank of Korea’s monetary policy committee cut its baserate by 25 basis points to 2.75 percent, its second easing in four months, taking the rate to its lowest in 19 months and just above next year’s expected inflation figure.

 It now sees Asia’s fourth-largest economy growing only 2.4 percent this year before picking up to growth of 3.2 percent next year, compared with the previous forecasts set in July for 3.0 percent and 3.8 percent, respectively.  “As global economic growth is unstable and uneven, the Bank of Korea will cut rates in the beginning of next year,” said Lee Chul-hee, chief economist at Tong Yang Securities, joining six others in a Reuters poll late on Thursday in predicting another cut by early next year.  

Governor Kim Choong-soo did not provide any strong indication of BOK policy direction at his news conference, but analysts said the export-reliant economy would require further monetary easing because of weak global economic prospects.

“The committee expects the pace of global economic recovery to be very modest going forward, and judges the downside risks to growth to be large,” the central bank said in its policy statement. Some analysts suggested there would be no need for additional policy easing for a some time if the economy at least shows some recovery, which Finance Minister Bahk Jae-wan has said would begin during the current quarter, if only at a modest pace.

The yield on the most-liquid three-year treasury bonds  added 3 basis points to end at 2.74 percent, still below the reduced base rate of 2.75 percent.  The won reversed initial losses to end local trade up 0.03 percent against the dollar on exporters’ unloading of dollars, but currency traders generally showed a muted reaction to the interest rate decision.

South Korea’s economy is heavily reliant on exports but Finance Minister Bahk said recently it probably reached the bottom of its trough in the third quarter.

In the second quarter, private consumption by value was just 1.3 percent above the average for last year and capital investment was 0.5 percent less, in real, seasonally-adjusted, terms, indicating limited room for further decline.  





The central bank also lowered the interest rate for its special loan programme for smaller firms to 1.25 percent from 1.50 percent in line with the lower policy rate.

The BOK decision, which brought the base rate close to next year’s inflation projection of 2.7 percent, was in line with the median forecast in a Reuters survey of 24 analysts.

 In July, the central bank trimmed the rate by a quarter point from 3.25 percent in a surprise move and for the first time in more than three years, ending a tightening drive that had lifted the rate by a total of 125 basis points.

The central bank also set its new inflation target for the 2013-2015 period at between 2.5 percent and 3.5 percent as the previous three-year target of 2 percent to 4 percent expires at the end of this year.

The BOK is the latest authority to join a wave of global monetary easing, as central banks look to counter the debilitating effects of the protracted euro zone fiscal crisis.

Brazil’s central bank earlier Thursday cut its policy rate by 25 basis points to a record low 7.25 percent.