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INSTANT VIEW 3-Bank of Korea cuts rates to record low 1.75 pct
March 12, 2015 / 1:16 AM / 2 years ago

INSTANT VIEW 3-Bank of Korea cuts rates to record low 1.75 pct

(Adds comments)

SEOUL, March 12 (Reuters) - South Korea's central bank cut interest rates for the first time in five months on Thursday in a surprise move, joining the ranks of other economies which have recently eased monetary policy to boost sluggish growth.

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KEY POINTS:

- Full story

- Twenty-nine of 33 analysts polled said the Bank of Korea would keep its monetary policy rate steady at 2.00 percent for a fifth straight month. Of those that saw a hold, 19 respondents said the BOK would cut rates in April.

- CHRONOLOGY

- Graphic link.reuters.com/hak95s

COMMENTARY:

YOON CHANG-YONG, ECONOMIST, SHINHAN INVESTMENT CORP

"Our view is that 1.75 percent is the last cut for a while, and there will not be another rate cut within the year.

"We believe that today's rate cut won't help much to revive domestic demand. Households have too much debt already, it would be hard for them to take on more loans. Plus demographic trends such as the rapidly aging society mean a rate cut wouldn't have much effect on spending habits."

"For corporations, it might be good for some firms in a short-term liquidity crunch but most Korean companies have the cash to invest if they want, they are just refraining from investment."

"Household debt is not the purview of the central bank, prices and economic growth are. The Bank of Korea was allowed to cut because the current price trend justified it, and it will have to continue to find justification for their decisions in prices."

LIM JI-WON, ECONOMIST, JPMORGAN CHASE & CO

"It (the rate cut) came one month earlier than we had expected."

"Additional cut possibility still remains if the growth situation does not improve much from here, but at this point it really depends on the data."

KIM JONG-SU, ECONOMIST, TAURUS INVESTMENT & SECURITIES

"The rate cut shows that the BOK has adapted to global easing of monetary policy, but I think additional rate cut will be hard."

"I expect the rate to be held steady from now on for the year 2015, since other economic indicators have to be strengthened to have an additional cut and rising household debts are also an issue."

"In my view, the impact from the rate cut to reviving domestic demand will be weak."

KRYSTAL TAN, ASIA ECONOMIST, CAPITAL ECONOMICS, SINGAPORE

"Worries about the slow pace of recovery, the weakness of the Japanese yen against the Korean won, and low inflation will also have factored into the BoK's decision to act today."

"Nonetheless, we think today's cut will mark the end of the BoK's easing cycle. A key concern that will keep it from lowering rates further is Korea's high household debt burden and the recent acceleration in household credit growth following earlier rate cuts."

LHEE JUNG-BUM, CHIEF ANALYST, KOREA INVESTMENT AND SECURITIES

"We will have to see what BoK has to further say."

"I think the BOK made a move because it couldn't stay idle."

"Other countries are also lowering interest rates, so I think the BoK responded by also lowing rates."

"Increased household debt was the opposing logic for lowering interest rates, and the BoK ignored it. It seems like BoK is taking a stance to buoy domestic demand and business."

KIM JI-MAN, FIXED-INCOME STRATEGIST, NH INVESTMENT & SECURITIES

"This rate cut is a surprising decision. We expected a rate cut this year. Considering outside conditions, I think the next rate hike will be delayed."

"This decision seems like a gesture that BoK cannot hold still. According to the chief's comments last month, he was somewhat hesitating to cut rates but economic data was not enough to be confident over the economy."

"I think domestic demand is much more important. The household debt issue has continued for 3-4 years. Structural growth is needed at this moment."

DAVID KIM, ECONOMIST, DAISHIN SECURITIES

"As South Korea is believed to have joined what people call a 'currency war,' it's opened the door to further rate cutting. The central bank will see how the situation goes in April and may cut rates once again in May or June."

"It is difficult to expect only the rate cut will boost domestic demand. It has to be combined with additional stimulus policies."

"Household debt isn't a crucial issue. Sometimes the central bank needs to consider slashing the rate to ease the burden of loan interest. I think slowing domestic demand is a priority for the Bank of Korea."

RONALD MAN, ECONOMIST, HSBC HONG KONG

"We think the two key drivers behind today's decision are: a weaker economic outlook and deflation pressures."

"Our baseline scenario is for a further 25 bps rate cut in Q3 2015, which will bring the policy rate down to 1.50 percent. This is primarily predicated on additional monetary easing by the Bank of Japan, which our Japan economist expects to be delivered next month."

"A weaker yen would impose additional downside risks to Korea's growth outlook."

MARKET REACTION:

Markets reacted sharply to the news, with the local currency extending declines before recovering and the key bond futures index rising.

The won was trading down 0.3 percent at 1,130.1 to the dollar at 0132 GMT while March futures on three-year treasury bonds rose 0.18 points to 109.09. The Korea Composite Stock Price Index was up 0.2 percent. (Reporting by Brian Kim, Christine Kim, Sohee Kim, Joyce Lee, Seungyun Oh, Ju-min Park and Choonsik Yoo; Editing by Tony Munroe and Se Young Lee)

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