In surprise move, South Korea cuts interest rate to record low

The Bank of Korea lowered its policy rate by 0.25 percentage points, marking the first rate cut in 12 months.
The Bank of Korea lowered its policy rate by 0.25 percentage points, marking the first rate cut in 12 months.PHOTO: REUTERS

SEOUL (AFP) - South Korea's central bank on Thursday (June 9) cut its key interest rate to a record low 1.25 per cent in a surprise move to address concerns over the impact of corporate restructuring on the sluggish economy.

The Bank of Korea lowered the policy rate by 0.25 percentage points, marking the first rate cut in 12 months.

There had been little hint of a cut, with the bank widely expected to maintain its wait-and-see mode amid what it has called minor signs of improvement in Asia's fourth-largest economy.

But mounting concerns over the negative impact on consumption from layoffs sparked by ongoing corporate restructuring, particularly in shipyards, apparently forced the bank's hand.

The cut also came after Federal Reserve chair Janet Yellen hinted at a more gradual rise in US key rate earlier this week, dampening expectations for a hike in the foreseeable future.

The bank's monetary policy board forecasts that the local economy will sustain its "trend of modest growth going forward" but that the "downside risks" have expanded, the bank said in a statement.

Momentum for economic recovery, which was already weak, recently further ebbed, with production, investment and consumption all in the doldrums.

"Exports have continued their trend of decline and the improvements in domestic demand activities such as consumption have weakened, while the sentiments of economic agents have also been sluggish", the bank said.

First quarter GDP growth rate was up a mere 0.5 percentage point from the previous quarter, the lowest since the second quarter of last year when consumption was battered by a Mers outbreak.

Facilities investment fell 7.1 per cent on-quarter, the first negative growth in two years.

South Korea's giant shipbuilders have announced plans to sell assets and cut jobs to reduce debt.

The government and the central bank on Wednesday announced a plan to create a US$9.5-billion fund to help recapitalise policy banks and ease the chilling impact on the financial market from corporate restructuring.

Finance Minister Yoo Il-Ho said Thursday that slumping exports, which fell six per cent on-year in May, could put further restraint on facility investment and other domestic demand sectors.

He blamed over-supply, excessive regulation and weakening competitiveness for the country's economic woes.

"The cure for reactivating the economy is only to be found in thorough corporate restructuring and industrial reform," he said at a meeting of cabinet ministers.