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Chance for a rate cut high after U.S. Fed move

Central bank governor says the reduction met his expectations
Aug 02,2019
The central bank governor raised the possibility of another rate cut after the U.S. Federal Reserve reduced rates Wednesday.

“If the economic situation worsens, we will obviously ponder on how we will address the issue through our monetary policy,” Bank of Korea Governor Lee Ju-yeol said Thursday.

“[But] we have to look at our own situation and make a decision,” he added when asked whether the Fed’s decision to reduce its rates by 0.25 percentage points would affect the Korean central bank’s monetary policy decision later this month.

The governor said the Fed’s decision matched expectations, but he expressed surprise that the cut was so conservative.

Despite the Fed’s rate cut, financial markets responded negatively to the stance of the U.S. Fed.

“Weak global growth and trade tensions are having an effect on the U.S. economy,” Fed chair Jerome Powell said on Wednesday in explaining the cut.

“It’s not the beginning of a long series of rate cuts,” he added. “When you think about rate-cutting cycles, they go on for a long time ,and the committee is not seeing that.”

He added that the U.S. is not in a “real” recession.

Although the Korean benchmark Kospi remained almost unchanged, in the morning it fell sharply. The main bourse closed 0.36 percent lower on Thursday after losing 7.21 points.

It lost as much as 14.94 points thirty minutes after the market opened. As the day progressed, stocks moved upward and made up the losses as investors rushed to purchase shares that had fallen in value earlier in the day.

The Dow Jones on Wednesday fell 1.23 percent losing 333.75 points. The situation was not much different for the S&P 500, which fell 1.09 percent, while the Nasdaq retreated 1.19 percent.

Other Asian markets also ended lower. Shanghai stocks closed down 0.81 percent, while Hong Kong’s Hang Seng dipped 0.76 percent. Tokyo closed 0.09 percent higher.

While the Fed’s relatively conservative stance gave the Bank of Korea some room to maneuver and time to consider whether it will cut rates, the headwinds that Korea now faces have been increasing pressure on the bank.

Much to the surprise of the market, the Korean central bank cut rates last month citing increasing concerns, including the prolonged trade tensions between U.S. and China and the newly emerging conflict between Korea and Japan.

The key interest rate was lowered from 1.75 percent to 1.5 percent, which is the first adjustment in eight months.

The recent trade retaliation by Japan has been especially worrying. In addition to restricting the export of three key materials essential to the manufacturing of semiconductor chips and displays, Japan’s move to take Korea off its so-called white list, which reduces export red tape for 27 countries, is seen as a heavy blow.

There is already concern about whether Korea will hit the central bank’s growth forecast of 2.2 percent.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]