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South Korea’s central bank cuts growth forecast

The Korea Composite Stock Price Index (.KS11) was up 0.5 percent.

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The meeting was the last rate decision for the majority of the seven board members, which added weight to the expectations for holding the key rate unchanged.

BOK Governor Lee Ju-yeol said that the central bank is adopting monetary policies with caution, as it is necessary to leave breathing room for future policy maneuvers amid continuing external uncertainties. The 2016 inflation projection was reduced to 1.2 percent from 1.4 percent.

The downward GDP revision largely reflects the market turmoil in China and other emerging economies that jolted global markets and weakened trade during the first quarter of this year, Mr. Lee said.

South Korea on Tuesday cut its outlook for economic growth and inflation this year blaming slumping exports but kept interest rates on hold saying it expected to see a modest pick-up in the second quarter.

South Korea’s exports have dropped every single month since the start of last year, plunging 13.1 percent on-year in the first three months of the year.

While most analysts expected no change in rates for April, Credit Suisse Group, HSBC Holdings and DBS Group Holdings are among those forecasting a rate cut this quarter, as they see the recovery losing momentum.

The Korea-version QE is different from QEs adopted in the United States and Europe, which begin to print money only after zero-rate policy rates have little impact to reinvigorate an economy. “As the government’s attempts to resuscitate growth are likely to be stymied, the onus of policy loosening falls even more heavily on the Bank of Korea”, said BNP Paribas economist Mark Walton in a report released after last Wednesday’s general election.

It appears that the central bank has frozen the rate in order to maintain financial stability, as a further cut is expected to only generate negative effects.

The South Korean won and shares rose on Tuesday morning, supported by an upward trend in global equities and the Bank of Korea’s decision to keep interest rates steady.

Krystal Tan, Asia economist at Capital Economics, said: “We think further easing is more likely than not in the coming months”.

The top central bank stressed that the current interest rate level was “accommodative to support growth”, although there may be a question as to how much accommodative.

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Although monetary policy is decided independently by the central bank, the ruling Saenuri Party had been urging the BOK to step up in spurring economic activity, possibly by tweaking the central bank charter to enable it to purchase securities, which it is now unable to do.

BOK Governor Lee Ju-yeol