South Korea’s central bank yesterday cut its benchmark interest rate for the first time in seven months, joining government efforts to boost the export-reliant economy as manufacturers such as Hyundai Motor Co face tougher competition from Japanese rivals boosted by the weakening yen.
The quarter percentage point cut in the official policy rate to 2.5 percent comes after South Korea’s parliament earlier this week approved US$15.3 billion of stimulus spending through an extra budget.
Bank of Korea Governor Kim Choong-soo said the interest rate cut was intended to “maximize the effect of the extra budget.”
Other central banks are also lowering borrowing costs to spur lending and growth amid an uncertain outlook for the global economy. Europe, India and Australia reduced key interest rates this month, while the Bank of Japan and the US Federal Reserve are engaged in an unprecedented expansion of their domestic money supplies.
The South Korean rate cut was a surprise to financial markets. Most analysts expected the central bank to leave interest rates unchanged after Kim said last month that the economy was on track for slow recovery and the central bank’s monetary policy stance was already supporting growth.
Kim expressed concerns about the Japanese yen’s fall against the US dollar and other currencies, which hurts South Korean exporters that compete with Japanese companies in overseas markets. The yen has dropped about 20 percent against the greenback since late last year.
Hyundai Motor, South Korea’s largest automaker, reported a 15 percent drop in earnings for the first three months of this year from over a year earlier.
Hyundai blamed lower vehicle production at local factories, but said the yen’s slide was a concern because Japanese automakers could aggressively lower prices of their cars to erode Hyundai’s share in the low to mid-end markets.
“So far the yen’s problem is not only that its slide is wide but also that its change is too rapid. It threatens the stability in the market,” Kim said. “We don’t see that the yen’s slide has stopped.”
South Korea’s economy will continue to improve at a moderate pace, but the possibility of a further slide in the yen is a risk that could hurt growth, the central bank said in a statement.
South Korea’s government reduced its growth forecast for the country to 2.3 percent in March from 3 percent, citing the impact of the yen on the economy.
Exports edged up 0.4 percent last month from over a year earlier, thanks largely to the increased shipments of electronics.
However, factory investments turned lower and domestic demand remained weak as companies are still reluctant to boost spending.
Kim said the bank expects the latest rate cut to add 0.2 percentage point to South Korea’s economic growth this year.