South Korea cuts key interest rate as economy slows

PUBLISHED : Friday, 12 October, 2012, 12:00am
UPDATED : Friday, 12 October, 2012, 3:00am


South Korea's central bank yesterday cut its key interest rate by 25 basis points to 2.75 per cent in response to a stronger-than-than-expected slowing of economic growth.

The second cut in three months followed downward revisions of the country's growth forecast for this year and data showing a significant slump in exports and manufacturing activity.

A similar cut of 25 basis points in July had marked the first policy easing by the Bank of Korea since early 2009.

"With inflation well under control, the argument in favour of this rate cut to shore up growth was overwhelming," said Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong.

"But I think that will be it for a while, with the central bank holding off any further cut this year."

Korea's export-driven economy has shown worrying signs of faltering in recent months as the global economic downturn, and in particular the crisis in the euro zone, has hit overseas shipments.

Exports last month fell year on year for the third consecutive month, while manufacturing activity in the same month contracted at the sharpest rate for nearly four years.

The HSBC purchasing managers' index for the month stood at a seasonally adjusted 45.7, compared with 47.5 in August. An index reading above 50 indicates the likelihood of expansion in manufacturing activity, while a reading below that level signals contraction.

Domestic demand is also showing signs of weakness, with retail sales steadily falling since May.

On Tuesday, the International Monetary Fund cut its growth forecast for this year for the Korean economy to 2.7 per cent, just weeks after lowering its estimate to 3 per cent from 3.25 per cent.

The central bank was expected to cut its own forecast, which has sat at 3 per cent, when it unveiled a new outlook late yesterday.

"There was a consensus that the [central bank] should have cut the rate in September. South Korea's rate has been relatively high after central banks in other countries slashed rates earlier this year," said Kim Soo-man, an analyst at IBK Investment and Securities.

"What's most important to watch from now on is the situation in Europe, regarding Spain and Greece."