South Korea cuts interest rates as economy loses steam

A South Korean national flag (left) and a Bank of Korea flag fly outside the central bank's headquarters in South Korea, on January 15, 2015.

SeongJoon Cho | Bloomberg | Getty Images

South Korea's central bank cut its policy interest rate for the second time in three months on Wednesday, as expected, to support slowing economic growth and address mounting deflationary pressures.

The Bank of Korea's monetary policy board trimmed the base rate by 25 basis points to 1.25%, a media department official said. BOK Governor Lee Ju-yeol is due to hold a news conference from 0220 GMT.

The rate cut follows a July easing and was in line with forecasts in a Reuters survey of 31 analysts. The new rate matches a record low seen until late 2017.

Local financial markets showed little reaction to the widely expected decision as investors awaited clues on future policy direction from the governor's news conference.

"We see a further rate reduction, possibly between January and February next year, because economic growth really is not going to pick up soon," said Kong Dong-rak, fixed-income strategist at Daishin Securities.

The BOK's move comes amid a wave of monetary easing globally, including by the U.S. Federal Reserve, as the world economy loses steam. The Fed is expected to deliver its third rate cut this year later this month.

South Korea's economic growth has tumbled in recent quarters, hit by cooling global demand and the prolonged U.S.-China tariff war, due to its heavy reliance on the export of chips, cars and ships.

Global investment banks have slashed their 2019 economic growth forecasts for Asia's fourth-largest economy to as low as 1.6%, compared with the central bank's projection for 2.2% from actual growth of 2.7% last year.

In its regular update on the global economic outlook released late on Tuesday, the International Monetary Fund slashed South Korea's 2019 and 2020 economic growth forecasts by 0.6 of a percentage point each to 2.0% and 2.2%, respectively.

The economy grew just 1.9% in the first half of this year from a year earlier, down sharply from a 2.5% gain in the second half of last year and a 2.8% rise in the preceding six-month period, central bank data shows.

The usually robust economy now faces the serious threat of deflation as consumer prices in September posted their first annual decline in the country's modern history.

Underlining deflationary pressures, central bank data released early on Wednesday showed import prices fell in September for a fourth consecutive month from a year earlier, the longest losing streak since late 2016.

Signs of progress in U.S.-China trade negotiations have provided some cause for optimism in South Korea's economy but uncertainties over the trade war are still high and exports have yet to show firm evidence of bottoming out.

Read More