BOK cuts rates to record low as trade, structural reform heighten risks
Reuters
Published Jun 09, 2016 05:37
BOK cuts rates to record low as trade, structural reform heighten risks
By Christine Kim and Choonsik Yoo
SEOUL (Reuters) - South Korea's central bank defied market expectations with a surprise cut in its policy rate to a record low 1.25 percent on Thursday as the government drives a major overhaul of the struggling shipping and shipbuilding industries.
It was the first rate cut since the Bank of Korea (BOK) last lowered rates in June 2015.
Just four of 23 analysts surveyed by Reuters had forecast the central bank would lower the rate, although most of those who saw a June hold forecast that rates would be cut in July.
The decision to cut rates was unanimous, Governor Lee Ju-yeol told a news conference.
"The problem is in the second half of the year, when we see downside risks increasing," said Lee. "We feel the sluggishness in global trade is worse than we expected. And there will also be downside risks once corporate restructuring begins in earnest."
A tumble in trade since January last year has darkened the outlook for South Korea's export-driven economy - Asia's fourth-largest - while persistently weak inflation opens the door to yet lower rates.
South Korea's government and central bank said on Wednesday they would create an 11 trillion won ($9.50 billion) fund to support two state-run banks most exposed to the once-thriving shipping sector but which now needs major structural reform.
By the time the proposed restructuring is complete in 2018, major shipbuilders' capacity will likely have fallen 20 percent, and their workforce by 30 percent.
BOK Governor Lee insisted the bank had fully signalled the rate cut at its previous meeting, noting the bank's decisions did not hinge on the policy of the U.S. Federal Reserve, which is expected to raise rates at least once this year.
Many analysts saw June or July as the last chance for the BOK to cut rates as the Fed rate hike looms closer.
"Many expected the U.S. Federal Reserve to hike rates in June or July but after the May jobs data a June hike now seems impossible. The BOK probably thought taking action before the Fed's rate hike would be safer," said Lee Sur-bee, a fixed-income analyst at Samsung (LON:0593xq) Securities.
The analyst said Thursday's move would be the last cut this year, a view shared by many other economists contacted by Reuters. The BOK chief added interest rates at home should remain higher than those of advanced economies.
Bond futures <0#KTB:> erased some gains after the news conference, but were still up 0.07 points to trade at 110.63. The won was flat against the dollar as of 0418 GMT after collapsing briefly following the rate cut.
Addressing the problem of South Korea's high household debt, the BOK chief said borrowing would likely slow, despite lower interest rates, because banks have adopted tougher screening of potential debtors.
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Inflation would likely approach the bank's 2 percent target in 2017, he said.
The BOK is expected to trim its GDP growth forecast of 2.8 percent for this year at a quarterly review in July.
The IMF lowered its 2016 GDP forecast for South Korea to 2.7 percent from 2.9 percent in April while earlier this month the OECD slashed its projection from 3.1 percent to 2.7 percent.
Written By: Reuters
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