South Korea may cut interest rates as early as next month

[Courtesy of Bank of Korea]

The Bank of Korea kept its benchmark interest rate at a record low of 1.5 percent Tuesday, but analysts expect a rate cut as early as next month to boost economic growth.

"The trend of improvement in the Korean economy is faltering amid a weakening of the recovery in domestic demand while the sluggishness of exports worsens,” the bank said in a statement after it held the rate for an eighth straight month

"In the coming months the Korean economy will continue its recovery going forward, centering around domestic demand activities, but in view of external economic conditions the uncertainties surrounding the growth path have increased."

"Uncertainties do still exist, related for example to the future evolutions of oil prices and of monetary policies in major economies, to instabilities in some emerging market economies and to the movements of financial market variables."

Analysts see the rate cut could come during the March 10 policy meeting as four members of the bank’s seven-strong monetary committee will be replaced in April.

Although the final policy meeting for the outgoing four members will take place in April, analysts have said they are unlikely to cut rates then - based on past practice - because their term ends the next day.

Bank of Korea governor Lee Ju-yeol said Tuesday’s decision to keep rates unchanged was not unanimous, saying one member voted to cut rates.

"The Committee decided to keep rates unchanged today as external conditions are changing quickly and we feel that more time is needed to observe the situation despite the local recovery softening a bit."

Inflation eased in January to provide some room for another cut if needed.

But the governor said, “even if inflation is low, I do not feel that is a factor that can be responded to with monetary policy."

"The resulting effect of lower interest rates is uncertain due to external unrest. There may be some side effects if rates are cut."

Lee said expected capital to continue leaving for some time. “We are watching the decrease in foreign holdings of local stocks very closely and feel that appropriate measures should be taken if needed."

"I cannot say for sure how lower interest rates will affect capital flows and what direction they will take."

Alex Lee

Park Sae-jin swatchsjp@ajunews.com

South Korea may cut interest rates as early as next month

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