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A senior South Korean central banker signaled an additional interest rate adjustment after the Bank of Korea (BOK)'s growth outlook change next month, indicating a possible rate cut in November.
"The BOK's growth and inflation outlook was revised down in July, and it reflected a change in the BOK's perception of economic situations," Kim Jun Il, BOK's deputy governor, told reporters on Tuesday.
BOK Governor Lee Ju-yeol gave a signal of future monetary policy direction based on the changed perception in July, before lowering the policy rate in August by a quarter percentage point to 2.25 percent, Kim said.
His comments indicated a possible rate change in November, rather than in October, after announcing the growth outlook revision scheduled for Oct. 15 when the October regular monetary policy meeting will be held.
Expectations are running high for the BOK's another rate cut. If the October outlook is revised down significantly and Governor Lee gives a signal of rate cut, South Korea's policy rate could be lowered once again in November.
The BOK downgraded its growth outlook for 2014 by 0.2 percentage point to 3.8 percent in July before lowering the policy rate a month later. The bank will release the third-quarter GDP data in late October.
The senior BOK official, however, cautioned about an additional rate cut, citing the potential increase in financial market risks coming from the prolonged low-rate trend.
According to Kim, the protracted low-rate trend would flatten a yield curve "in principle," or narrowing differences between short-term and long-term interest rates in the bond market. It would lead to a fall in profits of investors and financial institutions, which may seek to take "excessive" risks by purchasing riskier assets such as junk bonds or high-yield securities.
The risk-taking sentiment has not spread to the overall market yet globally as well as in South Korea, but it needs to closely monitor how it develops, Kim said.
His comment was in line with Governor Lee's recent wariness over growing demand in the market for further rate cut, which came in response to Finance Minister Choi Kyung-hwan's indirect pressure on it.
Choi said on Sept. 16 that South Korea has the still high level of policy rate compared with advanced economies such as the United States and Japan, noting the BOK has "sufficient policy room."
On the same day, Governor Lee said the policy rate alone could not boost growth, stressing the need for solving structural problems such as lower growth potential and falling workforce amid aging population, which should be tackled with microeconomic measures by the government.
"Since the global financial crisis, growth and recovery have slowed in the past six years. It is longer than a normal economic cycle and comes from the so-called balance sheet recession," said Kim.
Despite the low rate, losses and weaker capital base caused by the global financial crisis made companies get reluctant toward capital spending and investment. When such structural factors dent growth, the effect of interest rate policy would be smaller than in the normal situation, he said.
Kim said the structural factor, which blocks growth, should be removed or brushed off to maximize the effect of the expansionary fiscal policy and monetary easing.
Minister Choi repeatedly vowed to maintain an "expansionary" fiscal policy until South Koreans feel the effect of the stimulus package, while pressuring the BOK to cut rates further to meet the pledge.
