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Bank of Korea (BOK) Governor Lee Ju-yeol talks to reporters about the BOK’s decision to lower interest rates in Seoul on July 18. (Baek So-ah

The decision by the Bank of Korea Monetary Policy Committee (MPC) on July 18 to lower the benchmark interest rate from 1.75% to 1.5% annual is being seen as a preemptive measure exceeding market expectations.

In a Korea Financial Investment Association (KOFIA) survey of 200 securities specialists on July 3–8, 70% of respondents predicted the rate would be frozen. Many financial market observers predicted the MPC would lower the rate at a meeting in late August after the BOK confirmed whether the US Federal Reserve (Fed) would be lowering the federal funds rate later this month.

The BOK’s sudden reduction of the interest rate appeared based on the conclusion that a preemptive response was unavoidable amid worse-than-expected economic trends. The BOK has lowered its growth rate projection for the year from 2.5% to 2.2% – far below the 2.7% rate recorded last year. In a May MPC meeting, member Cho Dong-cheol voiced an opinion in favor of a reduction, while another member suggested the rate should be lowered “at the next meeting.” Referring to the process behind the MPC’s latest decision to lower the rate, BOK Governor Lee Ju-yeol said, “The only [minority] opinion came from committee member Lee Il-hyeong, who said it would be better to freeze the interest rate.” This means that six out of seven MPC members supported the interest rate reduction.

In an economic forecast last April, the BOK predicted the South Korean economy’s growth would remain at the 2.3% level for the first half of the year before recovering to 2.7% in the second half. The BOK’s monetary policy approach was to maintain the benchmark rate at a “level that does not constrain real economy activities.” But economic trends have fallen well short of expectations. In its latest economic forecast, the BOK estimated a 1.9% growth rate for the first half of the year and predicted a growth rate of just 2.4% for the second. The revised figures reflected disbursement of the supplementary budget and negative effects from the trade frictions with Japan.

The BOK said it plans to continue with its policy approach of monetary easing.

“We will maintain an easing approach in a way that shores up the recovery in the real economy,” Lee Ju-yeol said.

But the interest rate’s reduction to the 1.5% level also constrains possibilities in terms of future policy measures. Lee said, “Since this reduction does not place the benchmark rate immediately close to effective lower bound, the BOK could be seen as having some room to maneuver in policy terms.”

By Jeong Nam-ku, staff writer

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