Although the policy rate is just one cut away from an all-time low, the Korean central bank has room to aid the economy grappling with trade challenges and deflationary risks, its chief said Friday.

Unlike central banks of the United States, Europe and Japan with internationally trading currencies that are capable of pushing the interest rate to zero and sub-zero territory, there is a limit on how far the Korean bank can push its rate, Lee Ju-yeol, governor of Bank of Korea (BOK), told reporters Friday after the policy meeting sat out on a rate action for August, leaving two meetings left in the year.

“Although policy ammunitions are not sufficient as in the past, we do have necessary means to address economic challenges,” he said as the markets have already begun to price in one or two cuts down the road.

Last month, the BOK cut the rate by a quarter percentage point to 1.50 percent, a tad over the historic low of 1.25 percent kept from June 2016 to November 2017.

Lee said that two out of the seven-member board cast a dissenting vote, raising the likelihood of rate cuts on either Oct. 17 or Nov. 29.

He warned of inflation falling into negative territory in the coming months against last year’s high fresh food and oil prices. But he shrugged off concerns about deflation, a vicious cycle that led to lost decades for the Japanese economy.

“Prices may contract over the next few months, but once the base effect is gone, inflation will recover above 1 percent by early next year,” he said.

The three-year bond yield inched up 0.1 basis points to close Friday at 1.168 percent. The yield on the five-year bond rose 1.6 basis points to 1.232 percent and that of the 10-year bond gained 2.8 basis points to 1.276 percent.

The main Kospi closed Friday up 1.78 percent at 1,967.79 and the junior Kospi 1.83 percent higher at 610.55.

The BOK appears to be saving ammunitions until the Fed meeting on Sept. 17-18. Fed Chair Jerome Powell hinted in a speech last week that the U.S. central bank is ready to cut interest rates again after delivering its first rate cut in July for the first time in a decade. But he did not clarify the exact time or size of the move, citing uncertainty from the latest tit-for-tat tariff increases between the United States and China.

Adding to the global tensions is Korea’s own trade battle with Japan. Earlier in July, Tokyo tightened exports on key materials to Korea’s vital semiconductor and display sectors over a diplomatic row involving wartime compensation claims. It went on to remove Korea from its preferential fast-track trade list this month, causing Seoul to hit back with a similar action.

Lee said Japan’s export restrictions would cast a significant burden on the Korean economy given their economic interdependence but that it is too early to judge the impact of the fallout.

Asia’s fourth-largest economy is quickly losing steam as it faces strong economic headwinds at home and abroad. Heavy government spending helped prop up the country’s economy after a surprise 0.4-percent contraction in the first quarter, with its gross domestic product expanding 2.1 percent in the April-June period.

Weaker-than-expected growth and inflation trends prompted the BOK to deliver its first rate cut in more than three years last month. It further slashed its 2019 growth forecast to a decade low of 2.2 percent from the previous 2.5 percent.

The BOK for now does not intend to further downgrade the growth outlook for this year and the next, Lee said.

By Kim Hyo-jin

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]