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Between rate cut and pause, BOK to weigh options

Economists were evenly divided Sunday on whether the Bank of Korea would slash interest rates to a fresh low this week, ending an eight-month pause in the monetary easing cycle.

But regardless of whether a rate cut is coming, many thought that Korea’s economy needs a shot in the arm now in order to avoid an export-led recession and keep the recovery momentum alive.

“What Korea is witnessing now is the spillover of external shocks onto the domestic economy,” Hyundai Research Institute said in a report Sunday. “If this is not properly addressed, economic recovery will be delayed for a long period of time.”

It warned that Asia’s fourth largest economy was showing signs of contagion from exports, contracting sharply due to a slump in global trade, in domestic consumption, production and investment. 

The report comes along with a string of other recent economic data that has darkened mood in Korea, despite a respite in global financial and commodity markets.

Industrial output fell for a third consecutive month in January, while a separate private-sector survey showed manufacturing activity contracting at its fastest pace in six months in February.

Exports extended their period of monthly declines to the longest stretch on record, plummeting 12.2 percent in February from a year ago. 

Consumer sentiment fell to an eight-month low in February.

Joo Won, head of research at Hyundai Research, called for more aggressive policy action to spark the economy. 

“Macroeconomic policy measures don’t solve all problems, but policymakers should bear in mind their psychologically stabilizing effect for economic participants,” he said. “Interest rate decisions should be more preemptive,” he said, adding that it may be too late to change the rates after checking all relevant economic indicators.

On the forthcoming BOK rate-setting session on Thursday, Kim Yu-mi, analyst of BNK Investment & Securities, said the central bank will have to weigh between two options -- a cut now or next month -- which both seem to have an equally strong case.

After the February rate-setting meeting, BOK Gov. Lee Ju-yeol said that he saw room for further monetary easing, but was not convinced that an additional rate cut from the current record-low 1.5 percent would spur consumption and investment under the current circumstances. Although the meeting decided on a rate freeze, one of the seven monetary policymakers called for a cut, in a departure from the past several months, when decisions -- all for freezing the rate -- were unanimous.

“I see higher chances of a rate freeze. The BOK may give a signal for a cut this month and change the rate in April,” Kim said.

Yoon Yeo-sam of KDB Daewoo Securities, however, expects a cut to arrive this month.

“Industrial output, exports and other economic indicators suggest it’s time for a further monetary easing,” he said.

The BOK meeting comes ahead of other central banks’ interest rate review sessions, with the European Central Bank holding its session on March 10, Bank of Japan on March 14, and the U.S. Federal Reserve from March 15-16.

By Lee Sun-young (