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S.Korea cuts policy rates to 2.25 percent to support fiscal stimulus

English.news.cn   2014-08-14 12:12:33

by Yoo Seungki

SEOUL, Aug. 14 (Xinhua) -- South Korea's central bank lowered its policy rate by a quarter percentage point on Thursday, the first rate cut in 15 months, in a bid to support the fiscal stimulus package and maximize the effect of monetary easing.

Bank of Korea (BOK) Governor Lee Ju-yeol and six other policy board members decided to cut the benchmark seven-day repurchase rate by 25 basis points to 2.25 percent. It was the first cut since May 2013 when it lowered borrowing costs by a quarter percentage point.

The decision was in line with market expectations. According to a survey of 115 bond market investors conducted by the Korea Financial Investment Association, more than 80 percent of respondents predicted the rate cut.

The bond market already regarded the rate cut as a foregone conclusion. Yields on the three-and five-year Korea Treasury Bond (KTB) came closer to 2.5 percent, leaving little differences between the base rate and bond yields.

TO SUPPORT FISCAL STIMULUS

The rate cut came after the new economic team, led by and Finance Minister Choi Kyung-hwan, unveiled a fiscal stimulus package last month. The central bank cut rates to support the fiscal stimulus and maximize the effect of its loosening monetary policy.

The stimulus measures included 40.7 trillion won (39 billion U. S. dollars) of fiscal expenditure from the second half of this year and tax incentives to let companies spend excessive cash reserves as well as the easing regulations on mortgage financing by lifting the loan-to-value and debt-to-income ratios.

The implementation of both fiscal and monetary stimulus came as the already fragile domestic demand became weaker after the deadly ferry disaster.

The ferry Sewol capsized and sank off the southwestern coast on April 16, leaving 294 people, mostly high school students, confirmed dead. Until now, 10 people were still missing and presumed dead.

Consumers refrained from travel and entertainment as deep grief swept over the entire country, hitting hard the service industry, especially the lodging and restaurant sector.

In July, the finance ministry revised down its 2014 growth outlook for the economy to 3.7 percent from an earlier estimate of 4.1 percent. The BOK downgraded its growth outlook for 2014 by 0.2 percentage point to 3.8 percent.

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Editor: Yang Yi
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