It is Bank of Korea's (BOK) first rate cut since June 2016 and reverses the 25-point rate hike in November 2018, which was partly due to concern over rising household debt but also to give the central bank some more room to deal with any future economic downturns.
The rate cut comes after recent data showed a large drop in South Korean exports as the global economy cools, and BOK lowered its forecast for 2019 economic growth to around 2.2 percent from April's forecast of 2.5 percent, which had been cut from an earlier 2.6 percent.
South Korea's won fell 0.3 percent immediately after the rate cut to 1,182.6 per U.S. dollar, pushing this year's depreciation to 5.5 percent, before settling slightly higher at 1,178.5.
"The Board (of BOK) judges that the pace of domestic economic growth has slowed as construction investment has continued undergoing an adjustment and the slowdowns in exports and facilities investment have deepened, although consumption has continued to grow moderately," BOK said.
South Korea's gross domestic product slowed to annual growth of only 1.7 percent in the first quarter of this year, down from 2.9 percent in the fourth quarter of last year, with exports in the second quarter down 8.4 percent after a 8.5 percent fall in the first quarter.
BOK expects the decline in construction investment to continue as exports and facilities investment also recover later than it had expected while consumption will continue to grow.
South Korea's inflation rate has remained well below its 2.0 percent target - it was steady at 0.7 percent in May and June - and BOK expects inflation to remain below the path it predicted in April.
BOK forecast headline inflation would fluctuate below 1.0 percent for some time and then run at the low to mid-1.0 percent level in 2020.
The Bank of Korea issued the following statement:
"The Monetary Policy Board of the Bank of Korea decided today to lower the Base Rate by 25 basis points, from 1.75% to 1.50%.
Based on currently available information the Board considers that the pace of global economic growth has continued to slow as trade contracted mainly due to the US-China trade dispute. Global financial markets have been stable in general, with stock prices in major countries increasing in line primarily with expectations of monetary easing in major countries. Looking ahead, the Board sees global economic growth andtheglobal financial markets as likely to be affected by factors such as the degree of the spread of trade protectionism, the changes in the monetary policies of major countries, and geopolitical risks.
The Board judges that the pace of domestic economic growth has slowed as construction investment has continued undergoing anadjustment and the slowdowns in exports and facilities investment have deepened, although consumption has continued to grow moderately. Employment conditions have partially improved, with the increase in the number of persons employed having risen. With respect to future domestic economic growth, the Board expects that the adjustment in construction investment will continue and exports and facilities investment will recover later than originally expected, although consumption will continue to grow. GDP is forecast to grow at the lower-2% level this year, below the April forecast (2.5%).
Consumer price inflation has remained low at the mid- to upper-0% level, in consequence mainly of the continued decline in petroleum product prices. Core inflation (with food and energy product prices excluded from the CPI) has been at the mid- to upper-0% range, and the rate of inflation expected by the general public has been at the low-2% level. Looking ahead, it is forecast that consumer price inflation will fall short of the path projected in April and fluctuate for some time below 1% and then run at the low- to mid-1% level from next year. Core inflation will also gradually rise.
The volatility of price variables in the domestic financial markets has increased. Long-term market interest rates have fallen significantly, in line mainly with concerns about economic slowdowns at home and abroad.Stock prices andthe Korean won-US dollar exchange rate have fluctuated considerably, mainly affected by the US-China trade dispute and Japan’s export restrictions. The rate of increasein household lending has continued to slow, whilehousing prices have continued their downtrend.
Looking ahead, the Board 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, while paying attention to financial stability. As it is expected that domesticeconomic growthwill bemoderate and it is forecast thatinflationary pressures on the demand side will remain at a low level, the Board will maintain its accommodative monetary policy stance. In this process it will carefully monitor developments such as the US-China trade dispute, Japan’s export restrictions, any changes in the economies and monetary policies of major countries, the trend of increase in household debt, and geopolitical risks, while examining their effects on domestic growth and inflation."
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