Bank of Korea cuts benchmark repo rate by 25 bps to 1.25 pct, leaves door open for further cuts

The Bank of Korea cut its benchmark interest rate for the second time in 2019. The BoK cut its benchmark repo rate by 25 basis points to the record low of 1.25 percent, as was widely anticipated. The rate cut was driven by subdued economic growth, the uncertain global outlook, and headline inflation falling into deflation territory, noted Commerzbank in a research report.

For example, exports have dropped for 10 straight months while headline inflation eased to -0.4 percent year-on-year in September. Bank of Korea maintained an accommodative policy stance and kept the door open for further cuts next year.

The headline and core inflation are both below the central bank’s 2 percent target and on this basis, there is still further possibility of lower rates, said Commerzbank. However, the central bank noted concerns over financial stability and household debt.

The Bank of Korea stated that the Board will “conduct monetary policy so as to ensure that the recovery of economic growth continues and consumer price inflation can be stabilized at the target level over a medium-term horizon, while paying attention to financial stability”. Also, BoK stated that it is considering other options but not necessarily quantitative easing in case the conventional policy space contracts further.

“All in all, further easing is on the cards but BoK is keen to ensure financial stability. For USD-KRW, it is just slightly higher to 1187 after the rate decision. KRW is the laggard among Asian currencies this year, down 6 percent vs USD year-to-date”, added Commerzbank.