SEOUL, South Korea – Bank of Korea lowered its key interest rate to a record low on Thursday in a move that took market watchers by surprise.
South Korean central bank policymakers lowered the policy rate by a quarter of a percentage point to 1.25 per cent for the month of June. The move is the first rate cut since June last year. The bank lowered the key interest rate twice in 2015 to aid the slowing economic recovery.
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.
South Korean economy shows “no clear trends of improvement in domestic demand,” the central bank said in a statement. There are “considerable downside risks surrounding the future growth path, such as corporate restructuring and the slowdown in global trade.”
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 per cent of growth during the first quarter from the previous three months, the slowest pace since spring last year.
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 the state-owned banks so they can withstand the losses as they help the restructuring of the shipping and shipbuilding companies.