South Korea’s central bank yesterday cut its key interest rate for the first time in 15 months, providing support to an economy dragged down by the shock of a ferry sinking that killed hundreds of teenagers.
The Bank of Korea lowered its policy rate by a quarter percentage point to 2.25 percent. The bank had kept it unchanged since a rate cut in May last year.
Most analysts had predicted the bank would lower borrowing costs to boost consumer sentiment.
The sinking in April of the Sewol ferry killed 294 people and left 10 missing, mostly teenagers on a school trip, causing a national outpouring of grief. Consumer spending shrank in the April-to-June quarter, hitting its lowest in nearly three years.
“Slowdown in domestic spending is worse than expected, as dampening of public sentiment is delaying recovery in spending,” bank Governor Lee Ju-yeol said.
“We concluded that we needed to fuel momentum for growth by changing the sentiment,” he told a press conference.
The bank said South Korea’s exports continued to pick up, but investment by companies was weak.
Last month, Bank of Korea and the South Korean Ministry of Strategy and Finance lowered their growth outlooks for Asia’s fourth-largest economy.
According to the central bank, South Korea’s economy is likely to expand 3.8 percent this year instead of 4 percent, while the finance ministry predicted 3.7 percent growth, revised down from the previous forecast of 3.9 percent.
To encourage spending by consumers and companies, South Korea’s new finance minister last month unveiled stimulus plans that included easing mortgage rules to stimulate the housing market. The government also announced a new tax policy to encourage companies to pay more dividends to investors and raise wages.
Low inflation has given the central bank scope to cut interest rates. It said it would continue to give support to the recovery in coming months.
Analysts said the central bank was unlikely to impose an additional rate cut this year, preferring to monitor the impact of yesterday’s decision and the stimulus package.
“Real estate and stock markets are showing positive signs due to policy effects, so the bank will take a very cautious stance toward any further rate cut,” KDB Daewoo Securities analyst Lee Jung-min said.
Additional reporting by AFP
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