SEOUL: South Korea on Thursday became the latest country to cut interest rates as the central bank announced a surprise 25 basis point reduction to a record-low 1.75 percent, as it tries to fend off deflation and kickstart the struggling economy.
The cut is the second by the Bank of Korea (BOK) in five months following a similar move in October and it said in a statement that the economy is suffering from slow demand and lack of confidence among businesses and consumers.
“Exports have fallen ... domestic demand, including private consumption and investment, has remained sluggish and consumer sentiment showed little improvement,” the statement said. “The domestic economy will show a moderate recovery but growth will hover below our earlier forecast,” it added.
A painful economic slowdown in China – South Korea’s largest trading partner – will also pose a growing risk, the bank noted.
The news sent the won falling against the dollar, with the greenback buying 1,132.01 won, against 1,126.40 won Wednesday.
Thursday’s cut makes the BOK the latest Asian central bank to lower rates. In recent months China and India have both made two reductions, while Australia, Indonesia, Singapore and Thailand have also been forced to ease monetary policy.
And on Monday the European Central Bank launched its $1.2 trillion bond-buying scheme, known as quantitative easing, as it looks to bring an end to years of anaemic growth and kickstart inflation.
Japan has been embarking on a similar programme, with interest rates stuck at near zero for years.
The widespread easing measures come as the US Federal Reserve prepares to lift rates.
“The BOK would’ve been worried about falling behind the pace of global easing by holding the benchmark rate unchanged,” Park Sang Hyun, a Seoul-based economist for HI Investment & Securities, told Bloomberg News. “Further rate cuts will depend on economic data to be released from now.”
The BOK in January slashed its economic growth forecast for this year to 3.4 percent from the previously tipped 3.9 percent, while it also lowered its inflation outlook to 1.9 percent from the 2.4 percent earlier stated.
Slumping oil prices saw inflation fall to 0.5 percent in February, the lowest rate for 15 years, deepening fears of deflation that could hammer an overgrown property market.
Finance Minister Choi Kyung-Hwan voiced concerns over deflation earlier this month, warning that Seoul risked following a similar path taken by Japan during its “lost decade.”
The Finance Ministry, which had put considerable pressure on the BOK to consider a further rate cut, welcomed Thursday’s decision.
“The rate-setting committee took a preemptive measure in consideration of economic situations at home and abroad,” Choi told reporters.
“I believe that the rate cut will help boost economic recovery that has remained slow and help tackle low prices,” he said.
BOK governor Lee Ju-Yeol said the move was “desirable” given that both growth and price levels remained lower than expected.
“We already cut the rate twice last year but we thought that we needed to shore up momentum for further growth,” Lee told reporters. -- AFP