The Bank of Korea on Wednesday cut its main policy rate by a quarter point to a record low of 1.25 per cent to shore up growth as the export-driven economy struggles with global trade frictions and weaker chip prices.
Calls for monetary policy easing have increased recently, following the country’s first drop in consumer prices in September and 10 consecutive months of falling exports as the US-China trade war exacerbates the cyclical chip downturn.
“The deteriorating external conditions are piling pressure on our economic growth,” said Lee Ju-yeol, the BoK governor. But Mr Lee predicted that growth would improve next year on the back of the expected recovery in the global economy and the semiconductor sector.
The latest rate cut, which follows a quarter-point cut in July, comes after the IMF downgraded its outlook for the global economy, predicting the weakest growth for this year since the 2008 financial crisis. The Fund lowered South Korea’s growth forecast to 2 per cent from its previous projection of 2.6 per cent, citing slowing growth in China and the “spillover” from the US-China trade war.
The interest rate cut means South Korea joins other central banks in their efforts to spur growth through monetary stimulus. Singapore on Monday eased monetary policy for the first time in three years, following in the footsteps of Australia and India. The US Federal Reserve might make a further rate cut this month.
South Korea’s consumer prices fell 0.4 per cent last month, raising concerns that Asia’s fourth-largest economy will enter into a prolonged period of deflation, although government officials downplayed the risks, saying it was a blip owing to lower food prices.