The South Korean central bank yesterday cut its policy rate for the first time in three years to shore up growth threatened by a trade dispute with Japan.
The Bank of Korea lowered its key interest rate by a quarter percentage point to 1.5 percent following a meeting of its monetary policy committee, which also cut its growth forecast for the nation’s economy this year from 2.5 percent to just above 2 percent.
The bank cited slowing exports and domestic investment, and volatility in financial markets related to the trade dispute between the US and China, and Japanese curbs on certain technology exports to South Korea.
Photo: AFP
The bank had hiked the rate by 0.25 percentage points in November last year and last lowered borrowing costs in June 2016.
The bank said in a statement it would “carefully monitor developments such as the US-China trade dispute, Japan’s export restrictions, any changes in the economies and monetary policies of major countries ... and geopolitical risks, while examining their effects on domestic growth and inflation.”
Bank of Korea Governor Lee Ju-yeol said South Korea’s exports and domestic investment during the first half of the year were more sluggish than expected and that it’s “hard to be optimistic about the [economic] conditions moving forward.”
The rate cut came amid escalating tensions between South Korea and Japan over Tokyo’s move to tighten controls on the exports of photoresists and two other chemicals to South Korean companies that use them to produce semiconductors and display screens for smartphones and TVs.
Lee said the bank’s monetary policymakers assessed how the trade dispute could affect growth at the macroeconomic level.
Tokyo says the materials affected by the export controls can be sent only to trustworthy trading partners.
South Korea is also bracing for the possibility that Japan would take further steps by removing it from a 27-country “whitelist” receiving preferential treatment in trade.
Its removal from the list would require Japanese companies to apply for case-by-case approvals for exports to South Korea of hundreds of items deemed sensitive, not just the three materials affected by the trade curbs that took effect on July 4.
It would also allow Japanese authorities to restrict any export to South Korea when they believe there are security concerns.
“Considering the volume of trade between South Korea and Japan, and the connections between companies and industries, it’s hard to say the materialization of export restrictions and their expansion would have a small effect on [our] exports and our economy,” Lee said.
“It’s hard to make specific predictions for now on how the export restriction movement will develop and what kind of effect that would have... It wouldn’t be ideal to allow the situation to worsen and a lot of effort should be invested to prevent it from happening,” he said.
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