South Korea’s central bank cut its key interest rate by 25 basis points to 2.75 percent yesterday and slashed its economic growth estimate for this year as a result of the global downturn.
The second rate cut in three months came on the back of data showing a significant slump in exports and manufacturing activity.
A similar 25 basis point reduction in July had marked the first policy easing by the Bank of Korea since early 2009.
“Economic conditions at home and abroad worsened more sharply than previously estimated. We hope that the rate cut will help the recovery of the local economy,” Bank of Korea Governor Kim Choong-soo told a press conference.
The central bank revised down this year’s growth outlook to 2.4 percent from its 3 percent estimate in July and lowered its forecast for next year from 3.8 percent to 3.2 percent.
South Korea’s export-driven economy has faltered as the global economic downturn — and in particular the crisis in the eurozone — has hit overseas shipments.
Exports fell year-on-year for the third consecutive month last month, while manufacturing activity in the same month contracted at the sharpest rate for nearly four years.
Domestic demand is also showing signs of weakness, with retail sales steadily falling since May.
On Tuesday, the IMF cut its growth forecast for this year for South Korea to 2.7 percent, just weeks after lowering its estimate from 3.25 percent to 3 percent.
In a statement yesterday, the central bank said the global economy continued to face “great downward risks,” with the eurozone crisis likely to spread.
The South Korean government has been moderate in its fiscal support for the economy, apparently seeking to retain some firepower in case the global slowdown deepens.
It has unveiled two stimulus packages since June, totaling 13.1 trillion won (US$11.8 billion), or 1 percent of GDP.
The inflation rate accelerated to 2 percent last month, but remained comfortably below the central bank’s target of 3 percent.
The Bank of Korea said that it was setting its inflation target band for next year to 2015 at between 2.5 percent and 3.5 percent.
“Due to the protracted sovereign debt crisis in Europe, we don’t expect demand-pull inflation pressure to be high for the time being,” it said in a statement.
Separately, Brazil’s central bank on Wednesday slashed its interest rate for the 10th time since August last year, to a record low of 7.25 percent, in a bid to stimulate the nation’s sluggish economy.
The bank’s monetary policy committee, which announced the quarter-point reduction after the market closed, said the decision was made given inflationary risks, the domestic economy and global economic uncertainty.
Late last month, the central bank lowered its forecast for Brazil’s economic growth for this year from 2.5 percent to 1.6 percent, but it is counting on that number picking up next year.
The government, which has launched a series of stimulus measures this year, is banking on 2 percent GDP growth this year — down from an earlier forecast of 3 percent — while market analysts are forecasting 1.5 percent growth.
The Brazilian economy grew just 2.7 percent last year, down from 7.5 percent in 2010.