Published: Fri, July 19, 2019
Markets | By Erika Turner

South Korea cuts interest rate as Japan trade row simmers

South Korea cuts interest rate as Japan trade row simmers

Japan is considering whether to remove South Korea from its "white list" of countries with minimum trade restrictions, a move South Korean officials have said would cause a "tremendous amount of problems" and strain ties between Japan, South Korea, and the United States.

The accord confirms the complete and ultimate resolution of issues related to war-linked and other claims between the two countries and between the two peoples, while outlining Japan's economic aid to South Korea. Does the government have no curiosity what the USA and North Korea are telling each other?

Today the Bank of Korea, South Korea's central bank, trimmed its key interest rate by 25 basis points to 1.5 per cent. Governor Lee Ju-yeol said "economic circumstances have deteriorated since April".

"We believe that growth has slowed as exports and facility investment have worsened", Lee said.

The decision to cut the key rate also follows a series of downward revisions in the growth outlook for the local economy.

The Finance Ministry also has reduced its growth forecast to 2.4 and 2.5 percent from the 2.6 and 2.7 percent forecast in December.

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Growth worries have pushed central banks around the world to adopt a more dovish stance, following the U.S. Federal Reserve's lead, with the Bank of Korea going a step ahead and surprising with a rate cut on Thursday. While core inflation accelerated to its highest level in more than two years last month, the headline measure is well within the central bank's target band of 2.5 percent to 4.5 percent.

South Korea's policy rate was already lower than that of the USA, which now sits in a range of 2.25 percent to 2.5 percent.

According to June Park who teaches at George Mason University in South Korea, "If we limit the ongoing trade conflict to a short-term squeeze on the South Korean semiconductor industry, we can anticipate that if South Korea's performance on the global market is restricted, China may seize the opportunity to climb to the top".

The BOK has come under more pressure to cut rates after first-quarter GDP and inflation fell short of expectations and the U.S.

"A de facto low ceiling can in fact vary, depending on what it is based on, for instance the possibility of a fund outflow. With the rate cut, we took into account the effects of Japan's trade restrictions", reducing forecast growth to 2.2 per cent, lower than the government's own 2.4 per cent forecast.

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