South Korea’s central bank yesterday cut its key interest rate to the lowest point in two years in an effort to prop up its slowing economy as it is hit by a trade spat with Japan.
The move came as South Korean President Moon Jae-in battles to kick-start inflation — after prices fell for the first time last month — and boost the stuttering economy, with parliamentary elections due in six months.
It also makes the Bank of Korea (BOK) the latest central bank to slash rates around the world as officials try to prop up their economies in the face of a global slowdown.
The BOK lowered its key rate to 1.25 percent from 1.5 percent, citing contraction of global trade and “sluggishness in exports and facilities investment.”
Borrowing costs are now level with their previous record low, which was seen between June 2016 and November 2017.
“As it is expected that domestic economic growth will be moderate and it is forecast that inflationary pressures on the demand side will remain at a low level, the board will maintain its accommodative monetary policy stance,” the bank said in a statement.
Consumer price inflation is expected to hover around zero “for some time” before rising to the 1 percent range from next year, the bank said, far short of its target of 2 percent.
Analysts said that South Korea might be entering deflation territory after prices dropped 0.4 percent annually last month, the first negative reading on record.
The BOK said economic growth is expected to “fall below” the 2.2 percent projection made in July — the downgrade from an earlier projection of 2.5 percent.
GDP grew 2.7 percent last year, the weakest pace in six years.
Separately, China caught traders off-guard with a surprise injection into the financial system via loans to banks, ahead of data tomorrow that is expected to show a further slowdown in the domestic economy.
The People’s Bank of China added 200 billion yuan (US$28 billion) of one-year cash through the medium-term lending facility. It kept the interest rate steady.
The move took traders by surprise as the authorities usually inject liquidity when previously offered loans come due and the next batch will not mature until Nov. 5.
“It’s not expected by the market,” Standard Chartered PLC head of China macro strategy Becky Liu (劉潔) said, referring to the cash injection.
“They probably want to inject more long-term liquidity” to ensure ample supply during the tax payment season in mid-October and to support the economy, which is still facing growth pressure, she said.
China is tomorrow scheduled to release GDP data for the third quarter. It is expected to have grown at 6.1 percent from a year earlier, which would be the slowest pace since at least 1992.
Additional reporting by Bloomberg
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