BOK Cuts Rate to 4-Year Low as Lee Risks Capital Outflows

The Bank of Korea cut its benchmark interest rate to a four-year low as Governor Lee Ju Yeol risks spurring capital outflows in his effort to bolster the economy.

The central bank lowered the seven-day repurchase rate to 2 percent from 2.25 percent, the second reduction in two months, and downgraded its estimates for growth and inflation. Twelve of 22 economists surveyed by Bloomberg forecast the rate cut, while nine projected no change.

The decision was opposed by one board member and follows calls from Finance Minister Choi Kyung Hwan to ensure monetary policy is in “harmony” with the government. Lee warned capital may flow out of South Korea if the interest rate gap with other nations narrows and the won falls, and said countermeasures should be considered.

“The possibility of a further rate cut is open until the first half of next year,” said Park Jong Youn, a Seoul based fixed-income analyst at Woori Investment & Securities Co. “The BOK’s belatedly revised down its economic outlook, but 2015 figures still look too rosy.’

The won was at 1,064.13 as of 1:38 p.m. It’s weakened 3.5 percent against the dollar over the past three months.

The recovery in sentiment is weak, posing risks to growth, while the gap between output and the economy’s potential won’t close until the second half of next year, later than forecast, Lee said at press conference following the decision.

Capital Flows

The central bank will closely monitor risks related to capital outflows, Lee said.

The BOK trimmed its economic growth forecast for 2015 to 3.9 percent from 4 percent and its inflation outlook to 2.4 percent from 2.7 percent. For this year, it sees an expansion of 3.5 percent, down from 3.8 percent, and price gains of 1.4 percent, down from 1.9 percent.

The decision to lower borrowing costs shows the central bank shares the government’s view that policy support is needed to boost growth, said Lee Chan Woo, director general of economic policy bureau at finance ministry.

Consumer prices rose 1.1 percent in September from a year earlier, the statistics office reported Oct. 1, the least since February and below the central bank’s target range of 2.5 percent to 3.5 percent.

Factory output unexpectedly shrank 2.8 percent in August from a year earlier, a Sept. 30 report showed, while data released the next day showed exports jumped 6.8 percent last month after a 0.2 percent drop in August.

Policy Support

Choi has pledged to use 31 trillion won ($29 billion) of stimulus this year and proposed a record 376 trillion won budget for next year in an effort to support growth.

The BOK’s latest growth forecast for next year reflects the government’s expansionary policies, which will contribute about 0.2 percentage point to growth, Lee said.

Samsung Electronics Co., the nation’s biggest company by sales and market value, reported on Oct. 7 that its operating profit fell 60 percent in the third quarter from a year earlier.

‘‘Our economic outlook isn’t bright: households are suffering from high debt, corporate earnings are disappointing and big export markets are still far from full recovery,” said Lee Jung Joon, a fixed-income analyst at HMC Investment Securities in Seoul. “South Korea may need more rate cuts to gain meaningful recovery momentum.”

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