SEOUL • South Korea's central bank unexpectedly cut its policy interest rate for the first time in three years yesterday, as a trade dispute with Japan among other pressures heightened risks for the already slowing economy.

The Bank of Korea announced that its monetary policy board voted to cut the base rate by 25 basis points to 1.5 per cent, without elaborating, ahead of expectations in a Reuters poll that the board would lower the rate next month.

Bond futures rose and the won weakened as the earlier-than-expected rate cut indicated there could be another easing soon.

Stock prices, however, fell slightly as the move underscored trouble with corporate profits.

"I think today's cut means there will likely be one more cut, probably in November," said fixed-income analyst Kong Dong-rak at Daishin Securities, adding that a strong consensus among the policy authorities to support the economy probably prompted the central bank to move quickly.

Korean bond prices had pencilled in a rate cut or two in the near term especially since Bank of Korea governor Lee Ju-yeol and Finance Minister Hong Nam-ki both suggested the time for policy easing was near.

The Bank of Korea has come under growing pressure to cut rates after first-quarter economic growth and inflation fell short of expectations and the United States-China tariff dispute remains unresolved.

Early this month, South Korea's economy was dealt an additional blow as Japan announced plans to tighten restrictions on exports of materials for making chips and smartphone displays to its smaller neighbour.

Analysts say it is too early to estimate the damage, but the curbs could affect South Korea's economy at least by hurting profits at the country's computer chip and smartphone makers, as well as hitting sentiment for consumption and investment.

Global investment banks have downgraded their forecasts for South Korea's 2019 economic growth, with some expecting the pace to slow to below 2 per cent from the 2.7 per cent set last year. Inflation is also seen widely missing the central bank's 2 per cent target.

South Korea's economy surprisingly contracted in the first quarter from the previous three-month period, while annual inflation has stayed below its 2 per cent target for the past seven successive months.

South Korea's rate cut comes as Indonesia's central bank yesterday cut its benchmark interest rate for the first time since September 2017.

Bank Indonesia trimmed the seven-day reverse repo rate by 25 basis points to 5.75 per cent, as predicted by 23 of 33 economists in a Reuters poll.

REUTERS