MERS factor may press BOK for another rate cut

South Korea’s central bank is facing growing pressure to further cut the key interest rate upon concerns that the spread of the Middle East respiratory syndrome will drag down economic growth.

As the escalating impact of the virus is weighing on the economy, the Bank of Korea may decide to stimulate the already sluggish domestic market by announcing an earlier-than-expected rate cut, according to observers. The bank is scheduled to hold its monthly monetary policy committee meeting on Thursday.

“The spread of the disease is likely to restrain investment and consumption,” said Lim Hee-jung, senior researcher at Hyundai Research Institute.

“But it should be regarded as an additional trigger, not the sole factor, as the domestic market was already sluggish.”

Even without the MERS factor, the government should consider loosening the rate further as the growth rate has recently projected to fall to the 2 percent range, according to Lim.

“MERS may visibly slow the nation’s growth, just as the Sewol ferry sinking did last year,” said Citigroup researcher Chang Jae-chul in a report.

“The spread of the disease, on top of weak production and exports, has heightened the possibility of an impending key rate cut.”

Finance Minister Choi Kyung-hwan said Friday that the nation’s growth rate for this year will be slightly over 3 percent, a dip from the government’s previous forecast of 3.8 percent. The BOK’s figure is 3.1 percent.

The Korea Development Institute, too, said Korea would narrowly meet the 3 percent line this year, on strict conditions that it conducts key structural reforms, further lowers its key rate and prevents tax deficiencies.

Amid rising pressure for another rate cut, however, the central bank remains prudent on its stance.

“We will thoroughly analyze the recently updated economic indexes and their possible impact on growth, price and debts, before reflecting them in our monetary policies,” BOK Gov. Lee Ju-yeol said late last month.

The BOK chief has not made an official statement since the MERS outbreak.

Some market observers, such as HSBC, predicted that the BOK may choose to hold the rate cut until July, when it may lower the key rate by 0.25 percentage points to 1.5 percent.

By Bae Hyun-jung (tellme@heraldcorp.com)