South Korea unexpectedly trimmed its benchmark interest rate by 0.25 percentage points Thursday - the first cut for seven months aimed at boosting an economy hit by slumping exports. The move announced by the central Bank of Korea (BOK) leaves the key policy rate at 2.50 percent, following two similar cuts last year in July and October.
South Korea's export-reliant economy - the fourth largest in Asia - has been badly hit by shrinking global demand, with overseas shipments ffalling 1.3 percent last year The overall economy expanded just 2.0 percent in 2012 - the slowest growth in three years.
In April, the central bank lowered its 2013 growth forecast to 2.6 percent, just three months after slashing it from 3.2 percent to 2.8 percent. In a statement, the BOK said that while a moderate US economic recovery had continued, the sluggishness of economic activity in the eurozone had "deepened".
The bank "expects the global economy to continue its modest recovery going forward, but judges that the downside risks to growth remain considerable," it said. "Going forward ... the domestic economy will show a negative output gap for a considerable time, due mostly to the slow recovery of the global economy, to the influence of the Japanese yen weakening, and to the geopolitical risk in Korea," the BOK said. With inflation under control, the central bank had faced pressure to cut rates in co-ordination with recent government stimulus measures.
The rate announcement came a day after parliament approved a supplementary government budget of 17.3 trillion won ($15.85 billion), aimed at creating jobs and supporting smaller businesses. "The cut was necessary to keep in step with the general fiscal policy given that recent economic data has turned out to be weaker than expected," Lim Hee-Jung, research fellow at Hyundai Research Institute, told AFP.
It also fitted into a global easing trend, with the Reserve Bank of Australia cutting its benchmark interest rate to a record low Tuesday, following similar moves by the European Central Bank and others.
South Korea's industrial output shrank for the third straight month in March and exports only eked out a 0.4 percent on-year gain in April. The Korean peninsula is tentatively emerging from a period of elevated military tensions that witnessed the closure of the only remaining symbol of North-South Korea co-operation - the Kaesong joint industrial zone. The weakness of the yen has also caused serious concern, with exporters complaining their Japanese rivals are enjoying a substantial pricing edge in an already difficult market.
"The change in the yen's value is not only too wide but it's been changing too swiftly. It threatens market stability," said central bank governor Kim Choong-Soo. "We're following it very closely to see how it may further change down the road," Kim added. The governor said the combination of the government stimulus package and the latest rate cut could add an extra 0.3 percentage points to the BOK's forecast of 3.8 percent economic growth in 2014. The South Korean bourse's KOSPI index was up 1.2 percent after the rate cut announcement, with analysts reporting renewed interest from foreign investors who have been net-sellers for 16 of the recent 18 sessions.