South Korea: Quite possibly the last rate cut this year

The Bank of Korea has delivered its second and possibly last rate cut this year. The 7D repo rate was lowered by 25 bps to its record low of 1.25% at today’s meeting.
Ma Tieying16 Oct 2019
  • Growth worries and deflation concerns were the main reasons behind the ease
  • The room for another cut remains but it can come next year…
  • … because domestic demand has stabilised, property prices have rebounded…
  • … and inflation may have bottomed
Photo credit: AFP Photo

In line with our expectations, the Bank of Korea cut rates for a second time this year at today’s meeting. The 25bps rate cut effectively returned the benchmark 7D repo rate to its record low 1.25% level for the first time since October 2017.

Growth worries and deflation concerns

Growth worries and deflation concerns were the main reasons behind today’s policy move. Exports contracted for a tenth straight month by a sharp -11.7% YoY in September. The adverse impact of global growth slowdown and trade protectionism (Japan’s removal of South Korea from its whitelist in August, the additional US tariff hikes on Chinese products in September) has become more notable.

For the first time in more than half a century, CPI inflation turned negative at -0.4% YoY in September. Core CPI also slipped to 0.6%, its lowest since 2000. Sluggish commodity prices, a negative output gap, and slack labour market all contributed to the recent decline in inflation.

Rate cuts are done for this year

Rate cuts are done for this year, in our view. The BOK indicated in today’s policy statement that it will observe the effects of the two rate cuts delivered so far this year. Hence, the BOK sees no urgency to further ease monetary policy in the near term.

Indeed, domestic demand has shown some encouraging signs of stabilisation, probably helped by the latest fiscal and monetary stimulus measures. Retail sales rose notably by 3.9% MoM sa in August while consumer confidence edged upward by 4.4ppt in September. Property prices have started to pick up again in the wake of the first rate cut in July. On the MoM basis, the pace of house price increases has picked up to 0.3-0.4% in July-September vs nearly 0% in 1H19.

Inflation may have bottomed. The high base effect for CPI from weather shocks and a surge in food prices last year will dissipate from December. There is a good chance that CPI figures will return to the positive territory from November/December.

Further easing remains possible in 2020

Looking ahead, the BOK could ease again in 2020. During today’s press conference, Governor Lee saw room for the BOK to take further policy actions, if needed. The BOK could study non-rate policy tools if the room for rate cuts shrinks, while ruling out the option of QE.

Indeed, the benchmark rate has not reached the zero bound or Taylor rule implied policy rate of 1% (based on our estimate). A prolonged period of low interest rates could be tolerated by the central bank, given that the natural rate is also declining as a result of the structural slowdown in GDP growth and downshift in inflation and inflation expectations.

We forecast for the 7D repo rate to stay unchanged at 1.25% for the rest of 2019. Looking into 2020, we do not rule out another 25bps cut in 1H.

To read the full report, click here to Download the PDF.

Ma Tieying

Economist - Japan, South Korea, & Taiwan

The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong.

PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No.