July 18, 2019 / 1:27 AM / a month ago

Instant View: Bank of Korea surprises with earlier-than-expected rate cut

SEOUL (Reuters) - South Korea’s central bank unexpectedly cut its policy interest rate for the first time in three years on Thursday, as uncertainties from a trade dispute with Japan and a U.S.-China tariff war add to concerns over the economy’s outlook.

KEY POINTS

* Base rate now at lowest since November 2018

* Inflation averages just 0.6% in annual terms for first six months of this year, far below central bank’s 2% target

MARKET REACTION

* Seoul stock market's KOSPI .KS11 falls after rate cut underscores economic troubles

* 3-year treasury bond futures KTBc1 rise as investors welcome earlier-than-expected rate cut

* Won KRW= KRW=KFTC weakens slightly against the U.S. dollar, while awaiting news conference

CHO YONG GU, ECONOMIST, SHINYOUNG SECURITIES

“It seems a littler earlier than the consensus which was in August, which I think there would be dissenters to hold rate from today’s meeting.”

“It seems like the market will price in up to two rate cuts, and the door is open for another rate cut within this year.

“The delay in the semiconductor sector’s recovery as well as the rising issue with Japan seem to have caused today’s rate cut. The Japan issue will definitely weigh on South Korea’s growth.”

OH CHANG-SOB, FIXED-INCOME STRATEGIST, KOREA INVESTMENT & SECURITIES

“The consensus was a rate cut in August, but I don’t think the timing really matters. Bank of Korea seems to have decided to cut rates ahead of FOMC.

“I think it is right to say that the monetary policy stance has changed to easing stance. Since the Bank of Korea cut rates earlier than expected, so there could be another rate cut in the second half.

“Japan-South Korea row did trigger the rate cut. The Japan uncertainties will cause quite an effect to the economy but the unresolved U.S.-China trade dispute has also affected today’s decision.”

ALEX HOLMES, ASIA ECONOMIST, CAPITAL ECONOMICS

“Looking ahead, looser fiscal policy and a turnaround in the technology sector should help to support growth over the coming year, but with weak global growth set to drag on exports, Korea’s economy is likely to remain sluggish. Our forecast is for growth of just 1.5% this year. The central bank has nothing to worry about on the inflation front. Inflation was just 0.7% y/y in June, which is well below the bank’s 2% target.

“If growth and inflation remain weak, as we expect, further rate cuts are likely.”

LEE MI-SEON, FIXED-INCOME ANALYST, HANA FINANCIAL INVESTMENT

“The unexpected export curbs by Japan give a negative effect to South Korea’s economy. The U.S. Federal Reserve’s forward guidance on a rate cut is pretty clear, and so the Bank of Korea seems to have made such a decision. Just one rate cut wouldn’t be enough, and so I see another cut within this year.”

KONG DONG-RAK, FIXED-INCOME ANALYST, DAISHIN SECURITIES

“The rate cut was earlier than we thought but not totally unexpected. I think there was a strong consensus between policy authorities on the need for a rate cut that allowed the Bank of Korea to take action so soon. I think today’s cut means there will likely be one more cut, probably in November.”

Reporting by Joori Roh, Choonsik Yoo, Hayoung Choi; Editing by Jacqueline Wong

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