Foreign IBs forecast BOK’s key rate cut for September

Major foreign investment banks expect South Korea’s central bank to make another rate cut in September due to slumping exports hurt by the eurozone debt crisis and slowing inflationary pressure, a report showed Tuesday.

The Bank of Korea is forecast to lower the benchmark 7-day repo rate next Thursday by a quarter percentage point to 2.75 percent in what would be the second rate cut this year, according to the report by the Korea Center for International Finance.

The BOK froze the rate at 3 percent last month after delivering a surprise rate cut in July in an effort to shield the local economy from bitter impacts of the eurozone debt crisis.

The projection came as the prolonged eurozone debt crisis and China’s slowing economy have already dented Korea’s exports amid easing pressure on inflation.

HSBC said the BOK is likely to cut the borrowing cost this month in a bid to help boost sluggish domestic demand. Nomura said that Korea’s exports may contract for the first time in three years this year, warranting rate cuts down the road.

ING Bank economist Tim Condon also forecast a quarter-percentage point rate cut for this month, saying South Korea’s exports and factory output remained sluggish. The bank’s 2012 and 2013 growth projection stood at 3 percent and 3.4 percent, respectively.

Faltering exports and sputtering domestic demand are raising prospects that the Korean economy will grow less than the BOK’s full-year estimate of 3 percent this year. The government’s 2012 growth projection stood at 3.3 percent.

Exports, which account for about 50 percent out of the economy, are losing steam amid bleak global economic outlooks.

The country’s overseas shipments fell 6.2 percent on-year in August, leading their combined value to post a 1.5 percent on-year decline during the first eight months. Imports also dropped 9.8 percent last month from the previous year, indicating that domestic demand remains sluggish.

Easing price pressure is also likely to give further room to BOK policymakers to take action this month, experts say. (Yonhap News)