SEOUL, May 9 (Yonhap) — South Korea’s central bank slashed the key interest rate for the first time in seven months on Thursday as the yen’s weakness threatens to hurt the economy.
Bank of Korea (BOK) Gov. Kim Choong-soo and his six fellow policymakers lowered the benchmark seven-day repo rate by a quarter percentage point to a two-year low of 2.5 percent for May.
The bank froze the key rate for the sixth straight month in April after lowering the borrowing costs in July and October.
The decision surprised the market as most analysts predicted a rate freeze for May. The bond futures market shot up following the announcement.
The BOK said that the execution of an extra budget will help accelerate economic growth, but downside risks such as the yen’s slide also persist.
A rate reduction came as the government is ramping up its efforts to bolster the economic growth and other central banks are aggressively taking the easing policy stance.
“Global central banks are rushing to take an easing policy stance to spur the growth, giving the BOK the reason to follow suit due to increased external economic risks,” said Lim Noh-jung, an economist at I’M Investment & Securities Co. “Consumer spending and exports still remain weak, necessitating the central bank’s action.”
The government and the BOK have been at odds over the necessity of a rate cut and assessing the growth trajectory.
In April, the BOK resisted the government’s pressure for a cut, but the minutes showed that the rate freeze was made in a tight 4-3 vote with the governor casting the final vote.
The May cut indicates that more board members chose to lend support to the government’s stimulus drive even as a marginal rate cut may have limited impacts on boosting consumption and investment.
The Korean economy, which is feared to be on the low-growth trend, faces downside risks to growth such as the eurozone debt crisis and the yen’s slide.
Other central banks are rushing to further unleash money in a bid to revitalize the fragile economic growth. Central banks in the eurozone, India and Australia lowered their benchmark rates this month.
On the domestic front, South Korea’s industrial output shrank for the third straight month in March and exports only eked out a 0.4 percent on-year gain in April. The yen’s weakness has unnerved local policymakers on concerns that it would sap Seoul’s exports.
The government is making its efforts to bolster the economy as it sees the economic growth reach 2.3 percent this year. The BOK’s 2013 growth estimate stood at 2.6 percent.
The parliament on Tuesday approved the government’s proposed bill on an extra budget worth 17.3 trillion won (US$15.9 billion), setting the stage for the government to drive the economic stimulus.
The government said it welcomed the BOK’s decision as it will help create synergy in boosting growth together with fiscal spending.
The BOK’s rate decision has recently become a politically charged issue as the government and lawmakers put pressure on the bank to slash the key rate, making a rate freeze become a decision to secure the BOK’s autonomy.
Gov. Kim said last week that now is the time for the government to take actions to spur growth as the BOK has already adopted a monetary easing stance by cutting the key rate twice last year.
But analysts said that the May decision indicated that the BOK governor, also the chairman of the monetary policy committee, failed to convince other board members about the legitimacy of his argument as well as to properly communicate with the market.
Analysts are divided over the BOK’s next move as some analysts said that once the central bank acted this month, it may freeze the key rate for the rest of this year as the economy is expected to perform better in the second half.
But others argued that there is still room for the BOK to further lower the borrowing costs as a one-off rate cut has limited impact on shoring up economic growth.
sooyeon@yna.co.kr
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