Foreign IBs eye another rate cut within year

Major foreign investment banks expect South Korea to cut its key interest rate one more time within the year to buttress the faltering economy weighed down by the eurozone jitters, a report showed Friday.

Foreign IBs, including Nomura and HSBC, predict the central bank to slash the benchmark rate by 0.25 percentage point to 2.75 percent as early as September or by the end of this year at the latest, according to the report by the Korea Center for International Finance.

The Bank of Korea on Thursday lowered the 7-day repo rate to 3 percent for the first time in more than three years, which came as a surprise to the market as many analysts, including most of the foreign IBs, had bet a rate freeze.

Nomura economist Kwon Young-sun said in the latest report the BOK “will bring the rate down once more and keep it at that level for the whole of 2013.”

n a separate release, Ronald Man, an economist from HSBC, expected the central bank to deliver another 0.25 percentage-point cut by the end of the third quarter and then hold the rate for the following 12 months.

“Policymakers have opted to use monetary easing to support growth.”

BNP Paribas and Citigroup took a similar stance, projecting an additional cut by a quarter percentage point in the fourth quarter.

Foreign IBs cited worsening economic conditions here and abroad for further rate cuts. Besides the negative eurozone impact, the economy, Asia’s fourth-largest, has been losing steam on mounting household debts, which reached 857.8 trillion won ($744 billion) as of end-March.

The BOK earlier in the day sharply revised down the 2012 growth forecast to 3.0 percent as the persistent eurozone turmoil and crimping domestic consumption are expected to hurt the overall economic output.

The IBs noted lowering consumer prices, which grew at a slower pace to 2.2 percent on-year in June, also have lent support to monetary easing to boost the economy.

In contrast, Morgan Stanley remained cautious about a further rate cut, saying it will be too low considering Korea’s growth has hovered over 3 percent, the report said. 

(Yonhap News)