The Bank of Korea has lowered its benchmark interest rate from 1.75 percent to 1.5 percent and adjusted its growth forecast for the South Korean economy for this year from 2.5 percent to 2.2 percent with the global semiconductor industry showing few signs of recovery, the Japanese government restricting exports of semiconductor and display materials to South Korea, and the South Korean economy increasingly losing steam.
The central bank announced on July 18 that South Korea’s potential economic growth rate for 2019 and 2020 is estimated at 2.5 percent to 2.6 percent. Two years ago, the bank had estimated its average annual potential growth for 2016 to 2020 at 2.8 percent to 2.9 percent and for 2019 to 2020 at 2.6 percent to 2.7 percent. The latest forecast, 2.2 percent, is the lowest since the 0.8 percent forecast in 2009.
The downward adjustment was led by unfavorable global semiconductor market conditions. “The NAND flash and DRAM prices hit the ceiling in the first half of 2017 and the first half of 2018, respectively,” the bank explained, adding, “With the U.S.-China trade war dragging on, the market is unlikely to recover until late this year or early next year, although this prediction itself is uncertain.”
The Bank of Korea continued to say that Japan’s export restrictions also affected its prediction. “The potential impact of the restrictions is reflected in our macroeconomic assessment and it cannot be said that the impact is negligible in view of the magnitude of trade between South Korea and Japan and the correlations between South Korean and Japanese industries and companies,” it mentioned.
The central bank said that South Korea’s capital expenditures are estimated to fall 5.5 percent from a year ago this year and its current account surplus for this year is estimated at US$59 billion. Three months ago, the estimates were positive 0.4 percent and US$66.5 billion.
With the economic growth forecast lowered to a large extent, the Monetary Policy Committee of the bank cut the benchmark rate contrary to prevailing expectations that the rate will be lowered next month after the Fed cuts its rate this month. “The committee’s decision implies that the South Korean economy is in a really bad situation,” said Seoul National University professor Kim So-young.