SEOUL: Grappling with its first recession since the 1997/98 Asian financial crisis, South Korea cut interest rates to a record low of 3.75% yesterday and slashed its growth forecast for the year.
Bank of Korea governor Park Seung said that with inflationary pressures receding, the quarter percentage point rate cut was needed to bolster an economy battered by the North Korea nuclear crisis, a big corporate scandal and labour unrest.
Economists, who were split over whether the central bank would act this month, applauded the move.
“The rate cut should soothe frayed nerves at businesses, which is very important at this point in time,” said Kim Giseung, an economist at the LG Economic Research Institute.
The central bank said South Korea's gross domestic product (GDP) shrank an estimated 0.7% in the second quarter from the first, following a 0.4% drop in the first quarter. This means Asia’s fourth largest economy technically entered recession during the first half this year.
“The (monetary policy) board was aware that many have doubts about the effect of monetary stimulus on the economy,” Park said in reference to the rate cut. “But we shared the view that a rate cut was needed to overcome present economic difficulties. It will help ease the interest burden on households and companies, which will boost spending and provide more stimulus to a reviving stock market.”
Park said the economy had hit bottom in the second quarter and would grow steadily from the third quarter.
The government has mapped out steps, including tax cuts on consumer goods, to spur investment and spending as long held hopes for a second-half rebound have dimmed.
But weeks of political wrangling have prevented lawmakers from approving a 4.2 trillion won extra budget, while the government is considering bolstering the size of the package. – Reuters