More rate cuts coming: Foreign IBs

[THE INVESTOR] Korea may choose to cut the policy interest rate further from the current record-low level in an effort to maximize the effect of its recently-announced stimulus package, some foreign investment banks predicted.

According to the Korea Center for International Finance, JPMorgan and BNP Paribas noted the possibility of a fiscal-monetary policy mix in Korea in their recent analyst notes on the Korean Finance Ministry’s additional public spending plan. 

Citing the need to cushion risks from corporate restructuring, the ministry unveiled an economic stimulus package of at least 20 trillion won ($17.1 billion), including a 10 trillion won extra budget.

“JPMorgan and BNP Paribas, describing the spending’s size as medium, predicted that the Bank of Korea may seek to support the measure with an additional monetary easing,” said the Seoul-based KCIF, which monitors global financial markets and players.

The Bank of Korea in June ended a year-long hiatus in its monetary easing cycle, slashing the seven-day repurchase rate to a record-low 1.25 percent. 

The Finance Ministry, announcing the stimulus plan, reduced the country’s economic growth outlook for 2016 to 2.8 percent from 3.1 percent and cut its inflation projection to 1.1 percent from 1.5 percent.

Morgan Stanley, while calling for more action to counter low growth and low inflation, said that the stimulus measures would lift Korea’s growth rate by 0.3-0.4 percentage point. Citi estimated the increase to between 0.2 and 0.3 percentage point.

Japan’s Nomura expected Korea’s policy rate to be cut twice more this year.

“The rate may come down to 0.75 percent through two 25 basis point reductions,” Nomura economist Kwon Young-sun told reporters in Seoul.

He said the Japanese financial group has slashed Korea’s growth forecast for 2016 by 0.3 percentage point to 2.2 percent.

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