BOK slashes base rate to new historic low

[THE INVESTOR] The Bank of Korea on Thursday slashed the key interest rate to a new historic low in a surprise move that came one day after the government finalized measures to support corporate restructuring.

The seven-day repurchase rate has been cut by 0.25 percentage point to 1.25 percent, the lowest on record. The BOK last reduced the borrowing cost in June 2015 amid the outbreak of the deadly Middle East respiratory syndrome virus here. 

A reduction was seen coming, but not this month. Nearly 80 percent of bond market participants had expected no change in a survey.

“The monetary policy committee decided to lower the rate this month as price pressures remain modest and because the pace of future growth will likely be weaker than initially expected,” BOK Gov. Lee Ju-yeol told a press conference after the decision.

“It was a unanimous decision,” he revealed.

Korea’s economy is facing a double whammy of sharply contracting exports and persistently sluggish domestic consumption, while debt problems at hardest-hit shipping and shipbuilding companies will likely lead to sizable job losses.

The Finance Ministry is to release a revised economic growth outlook later this month, with experts predicting a cut in its 3.1 percent expansion forecast in September.

“(The monetary policy) board had chosen to save policy room even in the first quarter, when the economic conditions was pretty tough. Today’s decision, which came without waiting for a clearer sign of the economy’s condition in the second half to emerge, shows that the board’s main focus was on policy coordination,” said Yoon Yeo-sam, an analyst at Mirae Asset Daewoo Securities.

On Wednesday, Korea announced a plan to set up a 12 trillion won ($10.4 billion) fund to recapitalize policy banks, which have a high exposure to distressed shipping and shipbuilding sectors. Most of the funding, 11 trillion won, will come from the BOK in the form of loans.

“Expectations of delay in U.S. rate hikes seemed to have provided the basis for the decision,” said Kim Jung-sik, economics professor at Yonsei University in Seoul.

Many in Korea fear that a U.S. rate hike may spark an outflow of global funds from Korea.

The U.S. Fed’s decision on fund rates is expected to be out on June 15, which will lead right into a two-day monetary policy meeting in Japan from June 15-16. On June 23, Britons will go to the polls to decide whether Britain should stay or leave the European Union.

Lee said that a U.S. rate rise, although widely seen to not be imminent, won’t be too far away, and the U.K.’s potential exit from the European Union, although polls so far suggest it is less likely, may turn up volatility in global financial markets.

The benchmark stock index KOSPI shot to 2,035 points in the morning, the highest so far this year, but settled at 2,024.17 points, about 11 points lower than a day earlier.

The local currency retreated to 1,160.5 per dollar shortly after the news, but pared some of the losses to close at 1,156 won.

By Lee Sun-young (milaya@heraldcorp.com)