In a surprise move, South Korea's central bank slashed its policy rate by 25 basis points Thursday, apparently anticipating a further delay in what many believe is an imminent U.S. rate hike, sources in the Yonhap News said Wednesday.
The Bank of Korea (BOK) slashed the key rate to a new record low of 1.25 percent for June, marking the first rate cut in 12 months.
The BOK had stood pat on the key rate after sending it to the previous record low in four rate cuts between August 2014 and June 2015.
BOK Gov. Lee Ju-yeol pointed out a need to support the economy, saying the country's economic growth was expected to fall short of the bank's latest forecast.
"Economic growth in the first half is expected to be in line with our latest forecast for the first half released in April, which was a 2.9 percent on-year expansion. The problem is the second half. We believe downside risks will expand in the second half," he told a press briefing.
In its latest quarterly revision, the BOK had revised down its growth outlook for 2016 to 2.8 percent from the previous 3 percent. Another revision is due next month.
"Considering recent economic conditions at home and abroad, the growth trend is expected to fall short of the April revision," Lee said.
Thursday's decision came as a surprise to many as the South Korean central bank was widely expected to again extend its wait-and-see mode amid what it has called minor signs of economic improvement in Asia's fourth-largest economy.
South Korea's exports have fallen every single month since the start of last year, but the rate of drop slowed to a five-month low of 6 percent in May.
The bank's monetary policy board, however, noted a possible rise in downward pressure in the future.
"Looking at the Korean economy, exports have continued their trend of decline and the improvements in domestic demand activities such as consumption have weakened, while the sentiments of economic agents have also been sluggish," the board said in a released statement.
"The board forecasts that the domestic economy will sustain its trend of modest growth going forward, but in view of external economic conditions judges that the downside risks to the domestic growth path forecast made in April have expanded," it added.
In an earlier poll conducted by Yonhap Infomax, the financial news arm of Yonhap News Agency, 11 out of 13 economists surveyed also forecast a rate freeze in June, citing a possible U.S. rate hike this the month.
Expectations for a U.S. rate hike quickly dwindled after Janet Yellen, chairwoman of the U.S. Federal Reserve System, hinted at a more gradual rise in the U.S. key rate earlier this week.
"The board forecasts that the global economy will maintain its recovery going forward, albeit at a moderate pace, led by advanced economies such as the U.S., but judges that it will be affected by factors including monetary policy normalization by the US Federal Reserve, financial and economic conditions in emerging market countries, and international oil price movements," the monetary policy board said.
With its rate cut decision, the BOK apparently seeks to further boost market liquidity while the government is moving to inject up to 11 trillion won (US$9.55 billion) into the market to help finance corporate restructuring and bolster economic growth here.
On Wednesday the central bank said it will provide 10 trillion won for the 11 trillion-won fund designed to recapitalize policy lenders such as the Korea Development Bank, which in turn will provide additional funds to ailing local companies, especially those in the shipping and shipbuilding industries that are currently undergoing government-initiated debt restructuring processes.
"The board decided to cut (the key rate) considering that the growth of the local economy will likely weaken while upward pressure on consumer price inflation also remains weak," the BOK chief said.
"In addition, a need to preemptively ease the negative impact the ongoing corporate restructuring process will have on the real economy and the country's economic players has also been considered."
When asked about the possibility of an additional rate cut down the road, the top central bank said that there may exist a lower limit, but they still have room to maneuver.
