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South Korea’s central bank cuts rates, expects economy to contract this year

A South Korean national flag (left) and a Bank of Korea flag fly outside the central bank’s headquarters in South Korea, on January 15, 2015.

SeongJoon Cho | Bloomberg | Getty Images

South Korea’s central bank cut its policy interest rate to a fresh low on Thursday, working in tandem with the government to extend liquidity to businesses hit by the coronavirus pandemic.

The Bank of Korea’s policy board voted to cut the benchmark interest rate a quarter of a percentage point to 0.5%, the lowest since the bank adopted the current policy system in 1999, the bank said in a text message. That was in line with forecasts by 12 of 19 economists polled by Reuters.

The bank downgraded its 2020 economic projection to a 0.2% decline, from its February forecast for 2.1% growth. The contraction would be the biggest since the 1998 Asian financial crisis. The BOK also sees inflation for this year at 0.3%, down from 1.0% seen earlier.

Thursday’s decision, the second easing this year, marks the latest move by policymakers to boost stimulus. The BOK had previously pledged unlimited liquidity through June via repurchase agreements and began lending to securities firms for the first time in the its 70-year history.

Analysts predict the BOK will ramp up outright purchases of government bonds to soak up the public debt issuance needed to cover the cost of the third supplementary budget. 

“The decline in exports and manufacturing production will outweigh the likely rebound in consumption and service production, so we will likely end up with negative quarter-on-quarter GDP growth in the second quarter,” said Oh Suk-tae of SG Securities in Seoul, a unit of Societe Generale.

“We now see ‘stealth’ quantitative easing, that is sustained BOK purchases of government bonds without a formal announcement.”

Asia’s fourth-largest economy joins the United States, Australia, UK and New Zealand in bond-buying operations to nurse the economy through the pandemic.

South Korea is preparing for a third supplementary budget as April exports suffered the worst slump in 11 years while jobs vanished at the fastest pace since 1999. 

BOK Governor Lee Ju-yeol holds a news conference that will be livestreamed at 0220 GMT.

Source: CNBC

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