S.Korea lowers policy rate amid worry about trade row with Japan

(News Focus) BOK faces another tough call for rate cut amid heightened risks

(News Focus) BOK faces another tough call for rate cut amid heightened risks

The Bank of Korea's unexpected rate cut clearly underscores headwinds facing Asia's fourth-largest economy and the likelihood of the central bank having to override concerns of growing household debt and a rise in housing prices for another rate reduction in the near future, analysts said Thursday.

South Korea's economy surprisingly contracted in the first quarter from the previous three-month period, while annual inflation has stayed below its 2 per cent target for the past seven successive months.

The central bank followed the rate cut by lowering this year's economic growth forecast to 2.2 percent, just three months after it cut the projection to 2.5 percent from 2.6 percent.

"The policy board chose to lower the interest rate to support the economic recovery as both the growth and inflation trends were weaker than previously thought", the governor said.

The central bank says the Board believes the pace of global economic growth is continuing to slow, mainly due to the trade dispute between the United States and China.

The decision to trim the benchmark rate also came as the BOK slashed its growth outlook for the local economy to 2.2 percent from the 2.5 percent forecast three months earlier and 2.6 percent in January. The central bank didn't name the second person. -China tariff dispute remains unresolved. According to a Korea Financial Investment Association (KFIA) survey of 200 fixed-income experts, 70 percent predicted a rate on hold. -China trade dispute and Japan's export curbs, can not be cleared away soon, which will add pressure on the BOK to act again.

Korean bond prices had already penciled in a rate cut or two in the near term especially since the central bank chief and the finance minister both suggested the time for policy easing was near.

Japan's export curbs was one factor to economic assessment.

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"If the rate cut can boost assets like equities and bonds, it will attract inflows". Another board member said a cut was needed to address deteriorating economic conditions but should take place in July.

Lee's comment last month about "appropriately" responding to economic changes was also seen by some as signaling a cut.

Japan's export curbs were forecast to add uncertainties to the already-struggling export of South Korea.

The U.S. Fed is said to be poised to cut its own rate at its next rate-setting meeting later this month.

Thursday's rate decision was not unanimous.

"The US-China trade tensions have caused investment sentiment to weaken and the production slump to deepen".

"In this process it will carefully monitor developments, such as the U.S".

"With respect to future domestic economic growth, the Board expects that the adjustment in construction investment will continue and exports and facilities investment will recover later than originally expected", it said in a statement.

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