The Bank of Korea has cut the benchmark interest rate today again in three months after its March meeting.
As Middle East respiratory syndrome saps the vitality of the economy amid the performance of major exporters is getting worse due to the strengthening won value against major currencies, the monetary policy makers set out to stimulate the economy with a rate cut.
The Monetary Policy Committee of the Bank of Korea held a regularly scheduled monthly meeting in the morning of June 11 and decided to lower the rate to 1.50 percent from current 1.75 percent, the historic low. Earlier in March, the committee had reduced the rate by 0.25 percentage point to 1.75 percent. The main reasons for the central bank's decision to bring down the rate only in three months after the latest cut were the spread of the MERS virus amid the slow recovery of the global economy and the poor export performance due to the weak yen against the Korean won.
The export growth rate has continuously slowed since it turned to a negative number in January this year. In May, the figure slowed further down to -10.9 percent, the lowest level since August 2009 when the corresponding figure was -20.9 percent. To add insult to injury, the MERS epidemic has caused the economy to shrink further as people avoid going out and spend, which led the policy makers to cut the interest rate in order to revive the consumer sentiment.
Earlier, major foreign financial institutions had put out predictions that the Korean central bank would carry out a rate cut this month. Morgan Stanley, Nomura, HSBC, and BNP Paribas all said the Korean economy will need a shot in the arm to help export competitiveness and domestic consumption recover. In particular, Morgan Stanley commented that Korea's manufacturing sector is in a "pathetic state" while Standard Chartered said, "In a situation where the Chinese economy is slowing down, growth-oriented policy is more important than that focused on financial stability."
However, the household debt problem will likely pose a serious burden to the Bank of Korea. According to the bank, the balance of household loans with all deposit handling financial institutions as of the end of April was 765.2 trillion won, up by 10.1 trillion won from the previous month.