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BOK may hold off further rate cut amid easing US-China tension

Following signs of a thaw in US-China trade tension, speculation is building that South Korea may slow its pace of monetary easing, in step with the growing possibility of a global economic upturn.

Though the world’s top two economies face a bumpy road ahead, their latest reconciliatory move is expected to ease uncertainties -- especially for Asia’s fourth-largest economy, which is highly dependent on trade.

After Washington and Beijing announced their phase one agreement Friday to reduce some $160 billion worth of US tariffs on Chinese products, US Treasury Secretary Steven Mnuchin described the recent development as “very good for global economic growth.”

“We expect (the phase one deal) will be fully executed in January. And then we get to phase two,” he said Saturday at the Doha Forum in Qatar.

With the US and China accounting for 35.5 percent of total trade as of last year, Korea has suffered a heavy blow from the prolonged trade tension between the two countries.

According to the Bank of Korea and Korea Customs Service, Korea’s accumulated export volume as of end-November came to $496.7 billion, down 10.7 percent from a year earlier.

While the BOK assessed that the US-China factor has dragged down Korea’s gross domestic product growth by 0.4 percentage point this year, the Korea Development Institute predicted that Washington’s additional tariffs -- if they had been imposed -- would have further cut growth by 0.34 percentage point.

Amid the continued downward pressure on the economy, the BOK has cut the country’s key interest rate twice this year, once in July and then in October.

After the latest move, which brought the figure to a record low of 1.25 percent, the central bank said it would keep watch on the market, waiting for the easing actions to have the intended effect.

But as key indicators such as exports and investment continued to dwindle throughout November, speculation has grown that monetary policymakers might inevitably carry out another cut next year.

Bank of Korea Gov. Lee Ju-yeol chairs the Monetary Policy Board meeting on Nov. 29, when the bank froze the policy rate at the current record low of 1.25 percent. (Yonhap)
Bank of Korea Gov. Lee Ju-yeol chairs the Monetary Policy Board meeting on Nov. 29, when the bank froze the policy rate at the current record low of 1.25 percent. (Yonhap)

With the latest signs of reconciliation between the US and China, the BOK has earned some policy space to maintain the status quo until the semiconductor industry gains momentum.

Reflecting the optimistic market sentiment, Seoul’s benchmark Kospi closed at 2,170.25 Friday, up 1.54 percent from the previous day. Its credit default swap premium came to 25 basis points, the lowest since Oct. 29, 2007.

The local equity fund market gained 170.4 billion ($145.4 million) last week, while the average earning rate of 965 local equity funds was tallied 4.14 percent, outrunning the corresponding figure of 1.02 percent for overseas equity funds during the same period, financial market tracker FN Guide said Sunday.

Also, the US Federal Reserve, upon freezing its policy rate at the current 1.5-1.75 percent range last week, removed its reference to uncertainties from its statement.

However, uncertainties persist, as the US-China deal is built on the premise that China will implement the phase one requirements. Korea’s sluggish domestic market is also a plausible reason for further easing.

In a monetary policy report submitted to the National Assembly last week, the BOK said the country’s core inflation -- excluding the price-sensitive food and energy sectors -- remained in the zero percent range this year amid stalled growth. The central bank’s target figure is set at 2 percent.

“The earlier-than-expected phase one agreement (between the US and China) is certain to deliver a positive impact on the economy but it is premature to presume that Korea’s exports will rebound right away,” said Kang Seung-won, an analyst at NH Investment & Securities.

“Considering the prolonged slow growth and low inflation pace, the BOK is likely to implement another rate cut during the first half of next year.”

FN Guide data showed that while the local equity market perked up recently, most of the inflow funds were observed in the short-term profit money market fund and real estate, reflecting investors’ continued caution against volatility.

By Bae Hyun-jung (