BOK likely to cut key rate to 2.75% in September: poll

South Korea’s central bank is tipped to make another rate cut in September following its July rate reduction in a bid to prop up the local economy hit by the eurozone debt crisis, a poll showed Wednesday.

Eighteen out of 21 analysts forecast that the Bank of Korea will lower the benchmark seven-day repo rate by a quarter percentage point to 2.75 percent on Thursday, according to the survey by Yonhap Infomax, the financial news arm of Yonhap News Agency.

The BOK froze the rate at 3 percent last month after delivering a surprise rate cut in July, the first cut in more than three years, in an effort to cushion the impacts of the eurozone debt crisis on the local economy.

Analysts said that the weakening growth, evidenced by faltering exports, and eased pressure on inflation are likely to give the BOK room to cut the rate this month.

“A rate cut seemed to be warranted this month as the local currency remains firm despite shrinking exports,” said Hong Jung-hye, a fixed-income analyst at Shinyoung Securities Co.

The South Korean economy grew 0.3 percent on-quarter in the second quarter, a third of the 0.9 percent expansion in the first quarter, fueling concerns that the growth momentum is weakening.

The BOK’s 2012 growth forecast stood at 3 percent, but economists are expecting the full-year growth to slow to the 2-percent range.

The eurozone debt turmoil and China’s slowing economy have already dented Korea’s exports, which account for about 50 percent of the economy.

The country’s exports and imports showed sputtering performances in July and August, indicating that demand at home and abroad is shrinking amid the global economic slowdowns.

The country’s overseas shipments fell 6.2 percent on-year in August, compared with an 8.8 percent contraction in July, and posted a 1.5 percent on-year decline during the first eight months.

The government on Monday unveiled an additional 5.9 trillion won ($5.23 billion) worth of measures to boost domestic demand, adding to its planned 8.5 trillion won-fiscal spending without allocating an extra budget. But many analysts said that the stimulus measures may have a limited impact on bolstering the growth.

The eased pressure on consumer inflation is also likely to give solace to the BOK in taking actions this month, analysts noted.

Korea’s consumer prices grew 1.2 percent on-year in August, marking the slowest growth in more than 12 years, according to the statistics agency.

The growth of headline inflation remained in the 1-percent range for the second straight month in August, staying below the BOK’s 2010-2012 inflation target band of 2-4 percent.

But three analysts argue that the BOK may freeze the key rate for the second straight month in a bid to adjust the pace of its easing monetary policy stance, the poll showed.

“The BOK may need one more month to assess whether its July rate cut has been effective in propping up the growth,” said Yum Sang-hoon, an analyst at SK Securities Co.

“But a rate cut is a matter of timing, not a matter of choice, so I think that the BOK is likely to trim the key rate in October.”

The experts who bet on the rate freeze this month said that a rate cut is forecast to come in October when the BOK will announce its revised 2012 growth outlook.

Global central banks are moving to stem the bitter impacts of the eurozone debt turmoil on their economies. European Central Bank President Mario Draghi said last week that policymakers agreed to launch an unlimited bond-purchase program to lower borrowing costs of troubled eurozone countries.

Market players are awaiting whether the Federal Reserve would unveil plans for additional bond purchases to bolster the fragile U.S. economy at this week’s meeting. (Yonhap News)