South Korea

South Korea cuts interest rate to aid exporters as weak yen helps Japan

Central bank slashes repurchase rate as weakening of the Japanese yen hurts the outlook for exports, adding to easing around the world

PUBLISHED : Thursday, 09 May, 2013, 10:20am
UPDATED : Friday, 10 May, 2013, 3:43am


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The Bank of Korea joined central banks in Australia, Europe and India in cutting interest rates this month, as a weak yen dims the outlook for exports and record household debt weighs on consumption.

Bank governor Kim Choong-soo and his board lowered the benchmark seven-day repurchase rate to 2.5 per cent from 2.75 per cent, the central bank said yesterday.

The decision came after a four-to-three vote by the board against a cut last month, which showed the deepest division among the policymakers since 2006, and as data reveals a mixed picture of Asia's fourth largest economy.

Ruling New Frontier Party floor leader Lee Hahn-koo had urged a "more active role" for the bank, adding to pressure for a cut.

"What we're seeing is another round of global easing from Japan to Europe, and South Korea needs similar action," Lee Sang-jae, an economist at Hyundai Securities, said before the announcement. "The rate cut will help the nation's fight against a weak yen."

Lawmakers approved a 17.3 trillion won (HK$123 billion) extra budget this week to support the economy, and the central bank boosted special loans for small firms last month. The yen's 20 per cent slide against the US dollar over the past six months is aiding Japanese exporters of cars and electronics that compete with South Korean firms.

"The policy board committee is currently divided into two camps: the 'cut' camp, containing three members whose backgrounds are more government-oriented, and the 'hold' camp, with four members whose views appear more aligned with the neutral-hawkish governor Kim," Ronald Man, a Hong Kong-based economist for HSBC, said before yesterday's announcement.

South Korea's economy grew the most in two years in the first quarter as the government front-loaded spending. Industrial output also fell 2.6 per cent in March from the previous month, the biggest decline in a year.

The European Central Bank's president, Mario Draghi, said on May 6 that policymakers are ready to lower rates again if needed, after reducing them to a record low.

Australia this week cut rates by 0.25 per cent, taking them to their lowest since early 2011. India made a 0.25 per cent reduction last week.