SEOUL: South Korea's central bank slashed its policy interest rate for the second time in three months on Wednesday to match its record low and gave no clear signal that its easing cycle had ended - keeping the door open for another cut.
Bond prices rose modestly as Wednesday's decision had been widely expected, with the anticipated tightening in US monetary policy next year obscuring the outlook for South Korea's own policy direction.
The Bank of Korea trimmed its economic growth and inflation forecasts for both this year and 2015, also matching market expectations, but said South Korea had no imminent risk of falling into deflation.
The Bank of Korea's monetary policy committee cut the seven-day base rate by 25 basis points to 2.0 percent, matching the record low set during the peak of the 2008 global financial crisis, but one of the seven committee members voted to keep it unchanged, Governor Lee Ju-yeol said.
"Governor Lee gave no confidence at all that this rate cut would be sufficient to lift the economy to a self-sustained recovery and he sounded cautious overall, and this makes me maintain my view that another rate cut will come soon," said Kong Dong-rak, a fixed-income analyst at Hanwha Securities.
GROWTH, INFLATION FORECASTS DOWNGRADED South Korea's economy is expected to grow 3.5 percent this year and 3.9 percent next year, down from the 3.8 percent and 4.0 percent forecast in the central bank's July projection. Lee said next year's growth would reach only 3.7 percent without the government's fiscal spending increase announced recently.
"Our decision to cut rates was based on three main reasons: the fact that the negative output gap is expected to close later than expected, price pressures are likely to be weaker than forecast, and the slow improvement of sentiment among financial bodies may act as a downside risk on the economy," Lee said.
The negative output gap, the difference between an economy's actual output and what is seen as its full potential, has been wider than the central bank had predicted, Lee said.
The benchmark 10-year treasury bond yield dipped 6.2 basis points to 2.773 percent and the liquid 3-year yield dipped 4.2 basis points to 2.236 percent. Seoul stocks and the won showed a muted reaction.
The Bank of Korea also trimmed inflation forecasts for both 2014 and 2015 to 1.4 percent and 2.4 percent, respectively, from the previous 1.9 percent and 2.7 percent, in a scheduled update.
Still, some analysts see no clear evidence that the Bank of Korea was leaning towards cutting the policy rate any further, saying the global economy would not take a turn for the worse from its already slow recovery.
"For one, the current level is already at a record-low not seen since the post-Lehman days. To be sure, euro zone etc present a host of risk factors to keep an eye out for, but on balance the global economy looks a lot better placed now," Wellian Wiranto, economist at OCBC Bank in Singapore, said in a note to clients.
The finance ministry has submitted its 2015 budget bill to the parliament for approval. It plans to increase next year's fiscal spending by 5.7 percent - a sharp rise from the 3.5 percent increase set previously.
Governor Lee maintained his view that South Korea's trade-reliant economy was not faced with an imminent risk of following in Japan's footsteps and falling into deflation, blaming currently low inflation mostly on weaker oil prices.
Wednesday's rate cut follows an equal 25 basis point reduction in August, when the rate was cut for the first time in 15 months under pressure from Finance Minister Choi Kyung-hwan for coordinated stimulus efforts.
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