South Korea's central bank said Thursday it may consider further slashing its policy rate to help boost economic growth should conditions worsen amid escalating trade tension with Japan.
Last month, the Bank of Korea cut the benchmark rate by 25 basis points to 1.50 percent, citing slower-than-anticipated growth.
"Should external conditions worsen and downside risks expand, (we) may consider taking an additional policy measure," the Bank of Korea (BOK) said in a report submitted to the parliamentary finance committee.
The report comes amid Japan's imminent move to remove South Korea from its list of trusted trade partners given special treatment when purchasing goods and materials.
Tokyo has already been enforcing tougher export restrictions on three materials that are critical to the production of semiconductors and display panels, both key export items of South Korea, since early July.
"We cannot say (Japan's export curbs') impact on the South Korean economy will be small should Japan's export curbs expand by striking South Korea off the whitelist," it said.
"(The BOK) will maintain its stance of policy easing to support economic recovery, but an additional rate cut will depend on the impact of the (latest) rate cut and the rate of economic recovery," the bank said in its report.
BOK Gov. Lee Ju-yeol later affirmed that an additional rate cut will be on the table.
"If economic conditions worsen, (a rate cut) will of course have to be considered," he said while speaking to reporters.
The top central banker said Japan's export curbs, if intensified, may create "very huge risks," but that they alone may not warrant an additional rate reduction.
South Korea's exports have dipped for eight consecutive months since December, plunging 11 percent on-year to some US$46.1 billion last month.
The central bank earlier said the local economy expanded 1.1 percent from three months earlier in the April-June period, following an unexpected 0.4 percent on-quarter contraction in the first three months of the year.
But the economy roared back largely due to increased fiscal spending, which may fizzle out down the road, and in turn means that monetary easing should come to the fore.
The BOK chief has also hinted at an additional rate cut down the road, stressing the central bank still has room to maneuver.
Lee has noted a rate cut may not have as significant an impact as before because the difficulties currently facing Asia's fourth-largest economy are mostly due to external factors, including the prolonged trade dispute between the United States and China.
With its latest rate cut, the first of its kind since June 2016, the BOK widened the gap between its policy rate and that of the United States to 1 percentage point, a possible cause of an outflow of foreign investment here.
The South Korean central bank was apparently given more room to maneuver Thursday after the U.S. Fed slashed its own policy rate by 25 basis points to a range of 2.00 percent and 2.25 percent, narrowing the gap between the countries' key rates.
"It is believed that the effect of a rate cut on investment may have been reduced as large companies have become less dependent on external funds since the (2008) financial crisis," the BOK said.
Bank of Korea Gov. Lee Ju-yeol speaks to reporters at the Seoul headquarters of the central bank on Aug. 1, 2019. (Yonhap)
The central bank chief welcomed the U.S. rate cut but expressed some disappointment.
"The rate cut is in line with earlier expectations, but I believe Federal Reserve Chairman Jerome Powell's remarks are less dovish than what the market expected," he told reporters.
"The market is still paying close attention to the fact that Chairman Powell again vowed to take necessary measures to maintain the U.S.' growth momentum," he added.
In a press conference held Wednesday (U.S. time), Powell said the first U.S. rate cut since the financial crisis may not be the last of its kind in the near future but also that it did not signal the start of a long series of rate cuts. (Yonhap)
Park Byung-uk email@example.com
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