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Bank of Korea holds key rate steady at 1.25 percent, cuts growth forecast

South Korea’s central bank on Friday left its benchmark interest rate unchanged at 1.25 percent, while cutting its economic growth forecast for this year to the lowest level in a decade.

The widely expected decision to keep its policy rate frozen follows the Bank of Korea’s Monetary Policy Board’s move in October to trim the rate by 25 basis points to the current rate. It had come merely three months after cutting the rate to 1.5 percent in July.

The central bank is likely to maintain a “wait-and-see” mode for some time, with BOK Gov. Lee Ju-yeol saying that “there is a need to first see how the macroeconomy and financial stability of this country will play out.” 

BOK Gov. Lee Ju-yeol attends the monetary policy board’s latest and final rate-setting meeting of the year in Seoul on Friday. (Yonhap)
BOK Gov. Lee Ju-yeol attends the monetary policy board’s latest and final rate-setting meeting of the year in Seoul on Friday. (Yonhap)

Friday’s rate freeze decision was not unanimous, according to Lee, with one of seven policy board members voicing an additional 25 basis point rate cut.

Asia’s fourth largest and export-reliant economy has been struggling for months due to growing uncertainties stemming from the US-China trade war, prompting the BOK to trim its key rate in two consecutive sessions.

Along with its key rate announcement, the BOK cut its 2019 growth forecast to 2 percent from the previous 2.2 percent. Its forecast for next year was trimmed to 2.2 percent from 2.5 percent as well.

The 2 percent figure marked the slowest expansion since 2009, when the country announced a corresponding figure of 0.8 percent growth in the midst of a global financial crisis.

Noting the sluggish growth forecast, Lee expressed hopes of an economic recovery for next year.

“Though we’re maintaining a cautious stance, it seems that the local economy is currently establishing grounds (for a possible recovery),” the BOK chief said.

“There could be some fluctuations along the way, but it is expected to maintain the current level overall. The global uncertainties are expected to be alleviated around mid-2020,” he added.

While several surveys, including the one recently conducted by the Korea Financial Investment Association, have drawn consensus that the key rate would remain frozen for the rest of the year, experts are divided on the BOK’s upcoming decisions for next year.

According to analysts, the US Federal Reserve’s recent signals to put its key rate on hold at a range of between 1.50 percent and 1.75 percent affected the BOK’s decision to freeze its key rate as well, in a bid to prevent foreign capital outflow. Experts have expressed concerns that certain rate gaps between South Korea and the US could lead to a mass outflow of foreign capital.

“With the BOK maintaining a wait-and-see mode and the fact that the terms of four members of the policy board are set to expire next year, an additional rate cut is expected to come around July 2020,” Kim Ji-man, an analyst at Samsung Securities said.

Friday’s gathering of the monetary policy board was the last meeting of the year.

The next meeting of the policy board is scheduled Jan. 17. The terms of four of seven incumbent policy board members will run out in April.

By Jung Min-kyung (