Bank of Korea Cuts Rates to Record Low in Bid for Recovery

Bank of Korea Cuts Rates to Record Low in Bid for Recovery

(Bloomberg) -- The Bank of Korea cut its key interest rate to a new record low on Thursday, the latest stimulus move to shore up an economy battered by the coronavirus pandemic.

The decision to cut the seven-day repurchase rate by 25 basis points to 0.5% was predicted by 18 of 23 analysts surveyed by Bloomberg. One economist forecast a 50 basis point cut, while the rest saw no change.

The cut underscores concern within the board over risks the economy could continue slowing sharply, or even contract, despite progress in containing the outbreak at home. Exports are slumping as key overseas markets struggle to reopen from lockdowns, while job losses are surging and inflation is slowing.

“The external sector slowdown remains a severe headwind and is unlikely to be offset by domestic demand,” Krystal Tan, an economist at Australia & New Zealand Banking Group Ltd. in Singapore, said before the decision. “Broad-based weakness in economic activity along with low oil prices has intensified the risks of deflation.”

Thursday’s cut is the second since the outbreak after the BOK lowered rates by 50 basis points at an emergency meeting in March. The central bank has since taken a series of unprecedented steps to ease liquidity strains among firms and in the market.

The government has also set aside its usual fiscal prudence and is now planning a third extra budget that is likely to be bigger than the previous two.

Still, economists expect the economy to shrink this year for the first time since the Asian financial crisis in the late 1990s. The BOK is set to update its economic outlook later Thursday, having forecast 2.1% growth and 1% inflation in February.

BOK watchers will be keen to see what other measures Governor Lee Ju-yeol can deploy should the economy worsen, with conventional policy room running low. Some analysts expect the bank to announce plans to increase bond purchases as the government’s stimulus will inevitably require more debt issuance.

Thursday’s decision was the first under the BOK’s new board. With the policy preferences of its three new members still unknown to the public, any sign of dissent within the board will be watched closely for cues. One of the new members, Cho Yoon-je, didn’t take part in the vote Thurday, the BOK said.

Governor Lee typically announces whether the decision was unanimous or not in his post-decision press conference.

(Updates with more analysis)

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