The Bank of Korea (BOK) has now cut its rate by 50 basis points this year following a surprise 25 point cut in March.
South Korea has been hit by an outbreak of the rare Middle East Respiratory Syndrome, with the total number of deaths so far at nine. The outbreak, which has hit consumption and tourism, is the largest outside Saudi Arabia where the virus was discovered in 2012.
South Korea's manufacturers have been struggling with weak exports and the country's Gross Domestic Product expanded by only 0.8 percent in the first quarter, for annual growth of 2.5 percent, down from 2.7 percent in the previous quarter, and the weakest growth rate since the first quarter of 2013.
While consumer price inflation picked to 0.5 percent in May from 0.4 percent in the two previous months, the BOK said it still expects inflation to continue at a low level due to the impact of low oil prices.
The Bank of Korea (BOK) issued the following statement:
"The Monetary Policy Committee of the
Bank of Korea decided today to lower the Base Rate by 25 basis points, from 1.75%
to 1.50%.
Based
on currently available information the Committee considers that the US appears
to be emerging from its temporary economic slowdown and the improvements in the
euro area have continued as well. In emerging market countries including China
the trends of slowing growth have continued. The Committee forecasts that the
global economy will sustain its modest recovery going forward, centering around
advanced economies such as the US, but judges that the possibility exists of
its being affected by changes in the monetary policies of major countries, by
the weakening of economic growth in emerging market countries, and by uncertainties
over the restructuring of Greek debt.
Looking
at the Korean economy, the Committee notes that the trend of decline in exports
has accelerated and that consumption, which had been showing a recovery,
appears to have contracted since the outbreak of Middle East Respiratory
Syndrome (MERS). On the employment front, the unemployment rate has risen due
mainly to an expansion in job search activities, but the
employment-to-population ratio has also increased as the number of persons
employed has grown. The Committee judges that the downside risks to the
domestic growth path forecast in April have expanded, owing mostly to the
sluggishness of exports and to the impacts of the MERS outbreak.
Consumer
price inflation rose slightly from 0.4% the month before to 0.5% in May, due
mainly to increases in prices of agricultural, livestock and fisheries
products, and core inflation excluding agricultural and petroleum product
prices also rose slightly to 2.1%, from 2.0% in April. Looking ahead the
Committee forecasts that inflation will continue at a low level, due mainly to
the effects of the low oil prices. In the housing market, the upward trends of
sales and leasehold deposit prices have continued in both Seoul and its
surrounding areas and the rest of the country.
In
the domestic financial markets, influenced mostly by strengthened expectations
of a policy rate hike by the US Federal Reserve, stock prices have fallen and
the Korean won has depreciated against the US dollar. The won has fluctuated
within a certain range against the Japanese yen. Long-term market interest
rates have fallen back, after having risen in response mainly to interest rate
movements in major countries and to domestic economic indicators. Bank
household lending has sustained a trend of increase at a level substantially
exceeding that of recent years, led by mortgage loans.
Looking
ahead, while working to sustain the recovery of economic growth, the Committee
will conduct monetary policy so as to maintain price stability over a
medium-term horizon and pay greater attention to financial stability. In this
process it will closely monitor the trend of increase in household debt and
external risk factors such as shifts in major countries’ monetary policies, as
well as the trends of capital flows."
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