BOK slashes growth outlook, freezes key rate

The Bank of Korea on Tuesday kept the key interest rate unchanged at an all-time low for a 10th consecutive month, while presenting a slower growth of 2.8 percent for the domestic economy this year. 

BOK Gov. Lee Ju-yeol and six other members of the monetary policy board decided to freeze the seven-day repurchase rate at 1.5 percent, unchanged since June last year, until next review.

The central bank also slashed its forecast for gross domestic product growth in 2016 by 0.2 percentage point from 3 percent projected in January. Inflation would be 1.2 percent, also 0.2 percentage point lower that its earlier projection, it said.

Weaker than expected results of the domestic economy in January and the gloomier outlook for the world economy and global trade have factored in the revisions, the top central banker explained.

“We expect a modest recovery from the second quarter onward,” Lee told reporters at a news conference in Seoul after the board meeting.

Despite the changed economic outlook and some calls from outside the bank to do more to help spark the lackluster economy, the BOK stuck to its previous stance that the current interest rate level was accommodative to support growth, but had room for more cuts.

The BOK seems little changed from the previous month -- still cautious about bringing the borrowing cost down to a new historic low, said Daishin Securities’ analyst Park Hyuk-su said in a note.

“It has left the door open for future easing steps, with Lee saying that there is room for future rate cuts and stressing the importance of timing in delivering them,” he said.

HMC Investment Securities’ Kim Ji-man said the BOK has missed the best timing of a cut and is unlikely to find another this year unless the economy suffers another sudden shock.

“We hereby change our interest rate outlook for the year to no change, as the economy will likely improve -- albeit gradually -- from the tough first quarter,” he said.

During the news conference, the BOK governor reiterated his earlier comments made in Washington last week that the bank needs to save policy room for a worse time.

He also stressed the bank has to carefully weigh the expected benefits and side effects of a rate move before making any decision.

“It is a firm view of the board that problems Korea’s economy is facing today are more structural than cyclical and thus require a comprehensive response from fiscal, monetary policies and structural restructuring,” he said.

Tuesday’s rate decision was the last for four outgoing members of the rate-setting board, including Ha Sung-keun, who stuck to his call for a 25 basis point cut since the February meeting.

It was the first after Korea’s general election last week, in which the ruling camp lost its parliamentary majority status. Rate-cut advocates had called for a reduction this month, saying the government may find it hard to push forward its economic reform and recovery plans due to the changed political landscape.

The Korean won gained 1.2 percent to close at 1,136.28 a dollar, the strongest level since Nov. 6. The benchmark stock index KOSPI closed 0.11 percent higher.

By Lee Sun-young (milaya@heraldcorp.com)