SEOUL: South Korea on Thursday cut its key interest rate to a record low 1.25 percent in a surprise move to address concerns over the impact of corporate restructuring on the sluggish economy.
The Bank of Korea’s 0.25 percentage point reduction was the first in 12 months but there had been little hint of such a move, with many expecting it to maintain a wait-and-see policy after officials had said there were signs of improvement in the economy.But mounting concerns over the negative impact on consumption from layoffs sparked by ongoing corporate restructuring, particularly in shipyards, apparently forced the bank’s hand.
“Global trade turned out to be weaker than expected and downside risks are likely to grow in coming months when corporate restructuring gets underway in earnest,” Governor Lee Ju-Yeol told journalists.
“We need to pre-empt negative impact from corporate restructuring,” he said.
The cut came after Federal Reserve chair Janet Yellen hinted at a more gradual rise in US rates earlier this week, dampening expectations for any hike during the summer.
Lee left open the possibility of further cuts, saying low inflation dampens consumer sentiment.
The country’s inflation is likely to remain below the government target of 2 percent this year.
In a statement the bank’s policy committee forecast the economy will sustain its “trend of modest growth going forward” but that warned “downside risks” have expanded.
Momentum for economic recovery, which was already weak, recently further ebbed, with production, investment and consumption all in the doldrums.
“Exports have continued their trend of decline and the improvements in domestic demand activities such as consumption have weakened, while the sentiments of economic agents have also been sluggish,” the bank said.
First quarter economic growth came in at just 0.5 percent from the previous three months, the lowest since April-June last year when consumption was battered by the MERS outbreak.
Facilities investment fell 7.1 percent on-quarter, the first negative growth in two years.
South Korea’s giant shipbuilders have announced plans to sell assets and cut jobs to reduce debt.
The government and the central bank on Wednesday announced a plan to create a $9.5-billion fund to help recapitalize policy banks and ease the impact on the financial market from corporate restructuring.
Finance Minister Yoo Il-Ho said Thursday that slumping exports, which fell 6 percent on-year in May, could put further pressure on facility investment and other domestic demand sectors.
He blamed oversupply, excessive regulation and weakening competitiveness for the country’s economic woes.
“The cure for reactivating the economy is only to be found thorough corporate restructuring and industrial reform,” he said at a meeting of cabinet ministers.