TOKYO -- The South Korean central bank is widely expected to cut its benchmark interest rate at a policy board meeting on Thursday in the face of a rapid slowdown in the nation's economic growth.
The government already introduced a package of stimulus measures in July. The Bank of Korea is set to cut its policy rate in order to prevent the bottom from falling out of the South Korean economy through a combination of fiscal and monetary measures, analysts said.
The BOK also wants to put the brakes on a strengthening won.
The policy rate has stood at 2.5% since May 2013 when the central bank last carried out a cut. It is increasingly expected to be lowered by 0.25 percentage point to 2.25%.
Expectations of a rate reduction are growing as the South Korean economy has been slowing sharply. According to government data released on July 24, the nation's gross domestic product expanded 0.6% in real terms in the April-June period from the previous quarter, the lowest rate of growth in five quarters, as consumers have restrained their spending since the Sewol ferry tragedy in April.
Worried about the possible contracted equilibrium of the South Korean economy, the government unveiled a 40.7 trillion won ($39.78 billion) stimulus package when it released the GDP data. The package includes fiscal expenditures worth 12 trillion won in the second half of 2014 and an expansion of loans by governmental lenders to stimulate investment.
Meanwhile, the BOK has shown moves that may be taken as steps toward a rate cut. For example, Gov. Lee Ju-yeol, speaking at a lecture meeting in Seoul on July 16, warned against "growing economic downturn risks." On July 24, when the new economic package was made public, furthermore, the BOK announced a loan support program worth 3 trillion won.
Major French financial services company Societe Generale said in a report to customers that the BOK is gearing up to get in step with the government on monetary relaxation.
South Korean stocks soared as the market welcomed the combined efforts to prop up the nation's economy by the government and the BOK. On July 30, the benchmark Korea Composite Stock Price Index closed at 2,082, its highest level since August 2011.
In addition to the need to stimulate economic activity in South Korea, the strengthening won is prompting the BOK to cut its policy rate.
While countries with current-account deficits, such as India and Indonesia, have seen their currencies dumped by speculators, the won, underpinned by South Korea's surplus, has been appreciating on active buying.
The stronger won reflects brisk exports of automobiles and electrical and electronic equipment from South Korea. But if the currency continues to rise in value, exports, which account for 60% of South Korea's GDP, are feared to slow as the price competiveness of them will weaken.
The appreciation of the won is taking a breather in anticipation of the BOK's rate reduction and "won selling" market intervention. Now that financial markets are taking a rate cut into account, attention is growing over the BOJ's monetary policy stance.
"The BOK has traditionally been a hawk, hesitant to ease its grip on credit, but is shifting to a dovish stance in compliance with the government," said Masashi Murata, senior currency strategist at U.S.-based investment bank and securities firm Brown Brothers Harriman.
If the BOK decides on a rate reduction at the coming policy board meeting and includes words to keep the stronger won in check in its statement, expectations of an additional monetary easing are likely to emerge, Murata said.