The Bank of Korea (BOK) yesterday lowered its key interest rate to an unprecedented low, as it warned that the spread of Middle East respiratory syndrome (MERS) poses an imminent threat to consumption.
South Korea’s central bank cut the seven-day repurchase rate to 1.5 percent, the fourth reduction since August last year.
The MERS outbreak has killed nine South Koreans and put more than 3,000 in quarantine, threatening to dampen recent improvement in consumer sentiment in an economy that is under pressure from a slump in exports. It is the second straight year that policymakers have had to confront a blow to confidence and spending from unexpected quarters after a ferry-sinking disaster last year.
“The cut aims to ease negative impact from MERS and prevent consumer sentiment and production from freezing up,” said Chang Jae-chul, a Seoul-based economist at Citigroup Inc. “The BOK is trying to be more preemptive in taking action this time than it was after the Sewol ferry accident last year.”
South Korean President Park Geun-hye postponed a US trip to oversee her government’s handling of the outbreak. She has urged her Cabinet to prepare “all preemptive measures” to minimize the impact of MERS on the economy.
The Ministry of Finance said in a monthly economic report that it would closely monitor the effects of MERS on consumption and service industries, and would respond if needed.
BOK Governor Lee Ju-yeol said the rate cut was a preemptive move designed to reduce the economic fallout from MERS.
“While household debt has been a long-lasting issue that’s curbed consumption, MERS emerged recently as an imminent risk,” Lee said at a briefing.
Taking the key rate lower, which could further fuel the buildup of household debt, was opposed by one member of the policy board, he said.
MERS is now the biggest variable to South Korea’s economic outlook, said Lee, who flagged the possibility of a reduction in the central bank’s GDP forecast of 3.1 percent for this year when the next update is made next month.
Other risks cited by Lee and lawmakers include the timing of US interest rate hikes, an export slump and the harm caused to South Korea by the strength of the won versus currencies such as the yen and the euro.
The won strengthened 11 percent against the yen in the past 12 months and traded at 9.01 as of 12:32pm yesterday. It gained 9.8 percent versus the euro and weakened 8.3 percent against the US dollar during the same period, data compiled by Bloomberg show.
Overseas shipments fell 10.9 percent last month from a year earlier, the fifth straight drop and the steepest in almost six years. Business lobbies have expressed discomfort over the won’s strength against the yen and its impact on the nation’s competitiveness.
The MERS outbreak comes at a bad time because confidence is not yet strong enough to sustain an economic recovery, Morgan Stanley economists Sharon Lam (林琰) and Sung Woen Kang said. Negative media coverage can take a toll on consumer sentiment, as it did following the sinking of the Sewol ferry last year, they wrote in a report this week.
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