The Bank of Korea (BoK) unexpectedly slashed its benchmark interest rate Thursday - its first cut in over three years - and economists tell CNBC that the central bank could embark on further monetary easing this year, as growth concerns intensify.
In a move to lower borrowing costs, the central bank reduced its base rate by 25 basis points to 3.00 percent. Only three of the 26 analysts surveyed by Reuters predicted a cut, while the others all saw no change.
Exports, which account for around 50 percent of the country's gross domestic product (GDP), are at risk of falling further in the coming months, given lower demand from key markets the U.S., Europe and China, say economists South Korea's exports in June rose just 1.3 percent on-year, after contracting 0.6 percent in the previous month.
Sharon Lam, Korea Economist at Morgan Stanley, says concerns over the growth slowdown could drive the central bank to cut rates again, as soon as September.
"(Economic) growth will remain below trend for the next four quarters and the hopeful recovery in Korea could be delayed," she said.
Lam says in addition to a slowdown in exports, there are growing concerns around domestic consumption - which has been weakening in the recent months.
"Domestic consumption has been the weakest link to the economy; by cutting the interest rate, it could help to lower the debt service burden to consumers." She said. Korea's household debt stands at 74 percent of gross domestic product - among the highest in the region.
Patrick Perret-Green, Head of Asia foreign-exchange and rates strategy at Citigroup, amongst the contrarians in the minority calling for a rate cut, adds that with inflation well contained, policymakers have more room to ease without fueling price pressures.
Korea's consumer price index (CPI) declined to 2.2 percent year-on-year in June, compared to 2.5 percent in May, to the lowest point since October 2009.
"We believe that there is probably at least another 30 basis points of downside to rates as the market starts to price in the possibility of the repo rate falling to 2.5 percent," he said.
Tim Condon, Head of Research, Asia, ING Financial Markets is also in agreement that further rate cuts are on the table for South Korea, forecasting a 25 basis point reduction before the year-end.
"The immediate source of the slowdown is exports, but weakness in manufacturing sector could spread to the services economy as well which never recovered vigorously after the global financial crisis," Condon said.
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