BOK cuts rates to record low, seen supporting shipping overhaul
By Christine Kim
SEOUL (Reuters) – South Korea’s central bank cut its policy rate to a record low 1.25 percent on Thursday, sooner than expected, as the government drives a major overhaul of the struggling shipping and shipbuilding industries that could see large job losses.
This was the first rate cut since the bank last lowered rates in June 2015.
Just four out of 23 analysts surveyed by Reuters had forecast the central bank would lower the rate, but a majority of those who saw a June hold forecast that rates would be cut in July.
Market participants will hone in on the governor’s news conference to see whether Thursday’s decision was unanimous.
“It will be burdensome to cut rates again this year. Plans from the government for the second half of the year will be eyed, but for now I expect this to be the last rate cut this year,” said Lee Sur-bee, a fixed-income analyst at Samsung Securities.
“Many expected the U.S. Federal Reserve to hike rates in June or July but after the May jobs data a June hike now seems impossible. The BOK probably have thought taking action before the Fed’s rate hike would be safer.”
Bond futures <0#KTB:> jumped sharply after the decision. The won collapsed briefly but was flat against the dollar as of 0129 GMT.
Finance Minister Yoo Il-ho said in a meeting on Thursday that economic activity in the private sector was below par, although growth in the second quarter is expected to be better than the first. The comments were made just as the rate decision was announced.
Lower rates have been expected by analysts for a number of reasons as May inflation came in at 0.8 percent, well below the central bank’s 2 percent target.
A tumble in exports since January last year has also darkened the outlook for Asia’s fourth-largest economy.
As a result, the IMF lowered its 2016 GDP forecast for South Korea to 2.7 percent from 2.9 percent in April while earlier this month the OECD slashed its GDP projection from 3.1 percent to 2.7 percent.
The Bank of Korea is also expected to trim its GDP forecast for this year at its quarterly review in July. It currently forecasts growth of 2.8 percent.
Most analysts see one more rate cut to end the current easing cycle if the global economy rebounds next year.
To support the shipping industry restructure South Korea’s government and central bank will create an 11 trillion won ($9.50 billion) fund to support two state-run banks most exposed to the shipping sector. A 20 percent drop in major shipbuilders’ capacity and a 30 percent drop in their workforce is expected by 2018 following the restructure.
(Additional reporting by Dahee Kim; Editing by Eric Meijer)