Downward Rate Adjustment Likely
Korea Development Bank (KDB) said on Aug. 19 that South Korea’s appropriate benchmark rate for the second quarter of this year is 0.9 percent and the Bank of Korea is expected to lower the rate twice before the end of next year.
KDB explained that it estimated the appropriate benchmark rate based on South Korea’s GDP gap and inflation rate, the central bank’s target inflation rate, and other factors.
“Although the Bank of Korea lowered the key interest rate from 1.75 percent to 1.5 percent last month, the current rate is still higher than the appropriate level, which means a further downward adjustment is possible,” KDB explained, adding, “Adverse internal and external conditions such as the ongoing trade war between the United States and China, the domestic economic slump and Japan’s export restrictions are likely to lead to a downward adjustment down the road.”
“On the domestic side, a negative GDP gap is likely to continue, while putting pressure on the key interest rate, due to sluggish construction investments and capital expenditures and a weakening inflationary pressure on the supply and demand side,” it went on to say, continuing, “In the meantime, the U.S.-China trade war and the export restrictions will delay a recovery in export to add to the downward pressure.”
KDB also said that the benchmark rate may be lowered twice this year and next year and the current market rates including a three-year treasury rate of 1 percent to 1.25 percent reflect the prediction.