South Korea cuts rate sooner than expected as growth slows

AP News
Posted: Jun 08, 2016 11:48 PM
South Korea cuts rate sooner than expected as growth slows

SEOUL, South Korea (AP) — The Bank of Korea unexpectedly lowered its key interest rate to a record low on Thursday as policymakers worry that corporate restructuring and sluggish global trade will further drag on South Korea's economic recovery.

The central bank policymakers cut its policy rate by a quarter of a percentage point to 1.25 percent for the month of June, sooner than most analysts expected.

It was the first rate cut since June last year. The bank lowered the key interest rate twice in 2015 to aid the slowing recovery and to bolster consumption.

Most market analysts had expected the bank to lower interest rates later in the year as growth was expected to slow during the second half of this year.

But Lee Ju-yeol, the Bank of Korea governor, said policymakers unanimously decided to lower borrowing costs this month as it became clear that the recovery was expected to be slower than the bank had forecast in April.

He said the looming repercussions from corporate restructuring, likely to prompt major shipbuilding and shipping companies to cut jobs and assets, were another point of concern.

"Amid low inflationary pressure, growth trends of the domestic economy will likely be weaker than expected," Lee told a news conference.

South Korea has seen weak exports amid low crude oil prices that hit its shipyards and other its key export sectors. An export drop eased in May but growth momentum has remained sluggish.

Asia's fourth-largest economy eked out a mere 0.5 percent of growth during the first quarter from the previous three months, the slowest pace since spring last year.

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South Korea's government is focusing on restructuring shipbuilders and shipping industries that have been in losses due to a slowdown in global trade, supply gluts and the steep fall in oil prices. Debt restructuring of shipbuilders and shipping companies is expected to increase job losses and depress the economy in the southern region, where most shipyards, an important source of jobs, are located.

The rate cut comes one day after the government announced that it would create a fund of 11 trillion won ($9.5 billion) to shore up state-owned banks so they can withstand any losses as they help the restructuring of shipping and shipbuilding companies.