BOK signals rate cut after standing pat at 1.5%

The BOK's wait-and-see stance had been widely expected as it needs to gauge the impact of the rate cut on Asia's fourth-largest economy amid protracted US-China trade tensions and trade friction between South Korea and Japan.

After the decision to stand pat, BOK Gov. Lee Ju-yeol said, "It is difficult to gauge how changes in external conditions could affect our economic growth."

"Global trade is being contracted as many nations reinforce protectionist measures and the US-China trade dispute is escalating," Lee said.

Lee sent a signal that the BOK could cut the rate later this year, saying the bank has "room for maneuver" in its monetary policy to cope with economic conditions.

In a statement, the BOK said uncertainties concerning the path of the economic growth forecast have further risen, citing "the escalation of the US-China trade dispute and the heightened geopolitical risks."

Consumer price inflation will fluctuate for some time at "the

lower-0 percent level" as downside risks to the path projected in July have increased, the BOK said.

The BOK "will conduct monetary policy so as to ensure that the recovery of economic growth continues and consumer price inflation can be stabilized at the target level over a medium-term horizon,"

the statement.

The BOK chief also said that two board members cast dissenting

votes in the rate-freeze decision.

BOK Gov. Lee Ju-yeol told reporters that two dovish board members -- Cho Dong-chul and Shin In-seok -- called for the central bank to cut its key rate by a quarter percentage point.

Many analysts consider a dissenting vote as possibly signaling a change in the BOK's policy in the coming months.

"The volatility of the foreign exchange market has increased.

(The BOK) will conduct its monetary policy while paying attention to market movements," Lee said.

South Korea's consumer prices rose 0.6 percent on year in July, staying below the 1-percent threshold for the seventh consecutive month. But, Lee said it was too early to worry about the risk of

deflation.

There are growing arguments for the BOK to cut the key rate later this year as an escalating trade feud between the United States and China -- Seoul's top two trade partners -- is hurting global demand for South Korean goods.

Japan's export curbs are also expected to weigh on South Korea's economy. The neighbor implemented export restrictions of some key industrial materials to Seoul. Early this month, Japan also officially dropped South Korea from its list of favored trade partners.

South Korea's exports are set to extend their slump to a ninth month in August, hurt by a decline in outbound shipments of semiconductors.

The country's exports declined 13.3 percent in the first 20 days of August from a year earlier to US$24.9 billion. South Korea's exports fell 11 percent on-year to $46.1 billion in July, extending their on-year decline for the eighth consecutive month amid a lengthy trade war between the United States and China, and a drop in chip prices.

South Korea's economy contracted 0.3 percent in the first quarter from three months earlier, marking the worst performance since the 2008-09 global financial crisis. In the second quarter of the year, the economy rebounded by growing 1.1 percent on-quarter.

The central bank slashed its growth outlook to 2.2 percent from

2.5 percent, citing increased uncertainty. The country's finance ministry also trimmed its growth estimate for the year by 0.2 percentage point to a range of between 2.4 percent and 2.5 percent.

Some private economic institutes forecast that Asia's fourth-largest economy may grow in the lower end of 2 percent this year in the face of a slump in exports. 

Analysts expected the BOK to slash the key rate in October to prop up a slowing economy.

Except 2001 and 2009, when the nation's economy suffered the worst slowdowns, the BOK has never cut the rate at two successive policy meetings.

Shin Dong-soo, a fixed-income analyst at Eugene Investment & Securities, said the BOK would make a decision on monetary easing in the third quarter after confirming whether economic growth is further slowing down.

"At first, the BOK will see the impact of the July rate cut, and whether an extra budget will mitigate the pace of a slowing economy," Shin said. (Yonhap)