South Korea yesterday cut its key interest rate to a record low 1.25 percent in a surprise move to address concerns over the impact of corporate restructuring on the sluggish economy.
The Bank of Korea’s (BOK) 0.25 percentage point reduction was the first in 12 months, but there had been little hint of such a move, with many expecting it to maintain a wait-and-see policy after officials had said that there were signs of improvement in the economy.
However, mounting concerns over the negative impact on consumption from layoffs sparked by ongoing corporate restructuring, particularly in shipyards, apparently forced the bank’s hand.
“Global trade turned out to be weaker than expected and downside risks are likely to grow in coming months when corporate restructuring gets underway in earnest,” BOK Governor Lee Ju-yeol told journalists. “We need to pre-empt negative impact from corporate restructuring.”
Lee left open the possibility of further cuts, saying low inflation dampens consumer sentiment.
The nation’s inflation is likely to remain below the government target of 2 percent this year.
In a statement, the bank’s policy committee forecast the economy would sustain its “trend of modest growth going forward,” but added that “downside risks” have expanded.
Momentum for economic recovery, which was already weak, recently further ebbed, with production, investment and consumption all in the doldrums.
“Exports have continued their trend of decline and the improvements in domestic demand activities such as consumption have weakened, while the sentiments of economic agents have also been sluggish,” the bank said.
First-quarter economic growth was 0.5 percent from the previous three months, the lowest since April-to-June last year when consumption was battered by a Middle East respiratory syndrome outbreak.
South Korean Minister of Finance Yoo Il-ho yesterday said that slumping exports, which fell 6 percent year-on-year last month, could put further pressure on facility investment and other domestic demand sectors.
He blamed oversupply, excessive regulation and weakening competitiveness for the nation’s economic woes.
“The cure for reactivating the economy is only to be found thorough corporate restructuring and industrial reform,” he said at a meeting of Cabinet ministers.
Separately, New Zealand’s central bank yesterday left interest rates at a record low of 2.25 percent, although analysts predicted there could be further cuts if inflation does not rise.
Reserve Bank of New Zealand Governor Graeme Wheeler said more cuts were on the table though if inflation failed to reach a 1 percent to 3 percent target.
“Further policy easing may be required to ensure that future average inflation settles near the middle of the target range,” Wheeler said in a statement.
Inflation was 0.4 percent in the year to March 31 and has been below the bank’s target for more than 18 months.
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