Instant View: Bank of Korea surprises with rate cuts faster than expected

SEOUL (Reuters) – The South Korean central bank has unexpectedly lowered its key interest rate for the first time in three years on Thursday, as uncertainties stem from a trade dispute with Japan and a tariff war between the United States and China fuel concerns about the economic outlook.

KEY POINTS

* Base rate now lowest since November 2018

* Inflation averages only 0.6% year-on-year for the first six months of the year, well below the central bank's target of 2%

MARKET REACTION

* KOSPI .KS11 Seoul Stock Market Declines After Declining Rates Revealed Economic Problems

* 3-year Treasury bond futures, KTBc1, increase, investors welcome rate cuts faster than expected

* WR KRW = KRW = KFTC weakens slightly against the US dollar, pending the press conference

CHO YONG GU, ECONOMIST, SHINYOUNG VALUES

"This seems a little earlier than the consensus that took place in August and that, in my opinion, would allow dissidents to maintain the rate of today's meeting."

"It seems that the market will include up to two rate cuts, and the door is open for further rate reduction by this year.

"The lag in the recovery of the semiconductor industry and the growing problem with Japan seem to have resulted in today's rate cuts. The question of Japan will certainly weigh on the growth of South Korea. "

OH CHANG-SOB, FIXED INCOME STRATEGIST, KOREA INVESTMENT & SECURITIES

"The consensus was a rate cut in August, but I do not think timing really matters. The Bank of Korea seems to have decided to reduce its rates on the FOMC.

"I think it's fair to say that the direction of monetary policy has changed to soothe." As the Bank of Korea lowered rates earlier than expected, there could be another rate cut in the second half of the year.

"The Japan-South Korea line triggered the rate cut. Japan's uncertainties will have a significant effect on the economy, but the unresolved trade dispute between the United States and China has also affected today's decision. "

ALEX HOLMES, ECONOMIST ASIA, ECONOMY OF THE CAPITAL

"In the future, a more flexible fiscal policy and a recovery in the technology sector should help sustain growth in the coming year, but with weak global growth weighing on exports, the economy Korean should stay morose. We expect growth of just 1.5% this year. The central bank has nothing to fear on the inflation front. Inflation was only 0.7% year-on-year in June, well below the bank's target of 2%.

"If growth and inflation remain low, as we hope, further rate cuts are likely."

LEE MI-SEON, FIXED INCOME ANALYST, HANA INVESTMENT FINANCIAL

"Unexpected restrictions imposed by Japan on exports have a negative effect on the South Korean economy. The US Federal Reserve's interest rate cuts are quite clear and the Bank of Korea seems to have made such a decision. A single rate cut would not be enough, so I see another reduction in this year. "

KONG DONG-RAK, FIXED INCOME ANALYST, DAISHIN SECURITIES

"The rate cut was earlier than we thought but not totally unexpected. I think there was a strong consensus among the political authorities on the need for a rate cut allowing the Bank of Korea to take action as quickly. I think today's reduction means that there will probably be another reduction, probably in November. "