SEOUL - South Korea's central bank on Thursday slashed borrowing costs to a record low as policymakers raced to limit the economic damage wrought by an outbreak of a deadly respiratory disease.
The rate cut, predicted by a slim majority of economists in a Reuters poll, marked the fourth easing since August last year as Asia's fourth-largest economy reels amid a collapse in exports and sluggish demand. "We decided to cut rates today in a pre-emptive move to contain the economic fallout from MERS," Bank of Korea Governor Lee Ju-yeol told reporters after cutting the policy rate by 25 basis points to 1.50 per cent. "We monitored data for the past two weeks and we were concerned consumption could go down further at a fast clip," the central bank chief said, as markets speculated the government would soon announce stimulus worth billions of dollars.
Lee and analysts warned of risks to the economic outlook as the rapid spread of Middle East Respiratory Syndrome (MERS) since late May has pushed up the death toll to nine with 122 cases - deepening public anxiety and hitting consumer spending, which was only just beginning to perk up. "If tourism and domestic sentiment are severely affected, we think another (rate) cut is possible and fiscal stimulus will be launched to deal with the potentially catastrophic situation,"ANZ economist Raymond Yeung said.
Lee said the 3.1 per cent economic growth pencilled in for this year is likely to be trimmed for a third time this year when the central bank issues new projections next month, a sign authorities are worried of a debilitating blow to the economy as more tourists cancel visits and restaurant and cinema attendance shrivel. "The sense of foreboding crisis and fear of contagion will unsurprisingly cause Koreans to refrain from going out in general, much less browsing and shopping," said Wellian Wiranto, economist at OCBC Bank.
Global Sluggishness
The won fell briefly after the rate cut, before recovering to trade steady on the day, while stocks rose. Bond prices fell after the news conference as investors took profit from recent gains.
South Korea's economy grew 3.3 per cent last year from 2.9 per cent in 2013, but policymakers have said it was still too low compared to an average of 4.5 per cent recorded for the five years before the 2008 global crisis.
A slowdown in China, the biggest export market for South Korea's globe-trotting manufacturers, has hit exports and factory activity.
The World Bank on Wednesday cut its global growth outlook, highlighting the challenges facing Korea's export-reliant economy.
Comfortably low inflation and a need to tame the won's appreciation against the yen have supported further policy easing but the central bank is worried cheaper credit costs would fan the already heavy and growing household debt burden. "There is a need for us to respond more aggressively to household debt now," BOK's Lee said. "Overall, this speaks to the dilemma that the committee had to face," said OCBC's Wiranto, referring to the non-unanimous vote on Thursday's policy decision. "While there is a case for rate cut given that the potential economic impact of the disease can be dire...there is also the flip side of the fact that further monetary loosening risks egging on the household debt build-up."