Bank of Korea Unexpectedly Cuts Benchmark Interest Rate

Bank of Korea Governor Kim Choong Soo
Bank of Korea Governor Kim Choong Soo. Photographer: SeongJoon Cho/Bloomberg

The Bank of Korea unexpectedly cut borrowing costs for the first time in more than three years and Australia reported a decline in employment as Europe’s debt crisis damps growth in Asia.

Governor Kim Choong Soo’s officials lowered the benchmark seven-day repurchase rate by a quarter percentage point to 3 percent, the first cut since February 2009. In Australia, the number of people employed fell by 27,000 in June, the statistics bureau said in Sydney. Japan altered its stimulus program without adding extra money, while Indonesia left rates unchanged.

The sixth straight daily decline in Asian stocks highlighted concern that exports and financial markets are threatened by Europe’s failure to end a crisis that has weakened banks and triggered sovereign bailouts. Signs of improvement within Japan’s economy may have encouraged the central bank to refrain from a bigger step than boosting an asset-purchase fund while scaling back a credit loan facility.

“What we’re seeing is a global policy response from Europe to China and now Korea to stave off a deep recession,” said Kong Dong Rak, a fixed-income analyst at Taurus Investment & Securities Co. in Seoul.

Two of 16 economists surveyed by Bloomberg News predicted the move in South Korea, while the rest forecast no change.

In Japan, the central bank expanded its asset-purchase fund to 45 trillion yen ($564 billion) from 40 trillion yen, while the loan program was pared to 25 trillion yen from 30 trillion yen. The central bank kept its benchmark interest rate between zero and 0.1 percent and monthly bond purchases at 1.8 trillion yen.

Currency Moves

The Japanese currency initially weakened against the dollar before resuming gains, trading at 79.50, up 0.3 percent as of 2:50 p.m. in Tokyo. Kazuhiko Sano, chief strategist at Tokai Tokyo Securities Co., said that recasting the stimulus programme “can’t be regarded as additional monetary easing.”

The BOJ said it will buy more treasury bills and remove the minimum bidding yield for the securities, moves that may smooth its operations after failures at some bond-buying auctions.

Asian stocks fell after the policy moves and the unexpected job losses in Australia and before China’s report on gross domestic product tomorrow. The MSCI Asia Pacific Index slid 1.5 percent. The Chinese economy may have grown 7.7 percent in the second quarter, the least in three years, according to the median forecast in a Bloomberg News survey.

‘Preemptive Manner’

“We can’t sit by idly with deteriorating external conditions cutting our economic growth,” Bank of Korea Governor Kim told reporters in Seoul today, adding that the cut should help boost growth while having a limited effect on inflation. “We moved in a preemptive manner as the monetary policy authority because our GDP gap is turning negative, meaning actual growth is trailing potential.”

South Korea’s central bank “moved far faster than expected, reflecting a worsening global economic outlook,” said Lee Sang Jae, a senior economist at Hyundai Securities Co. in Seoul. “Policy makers opted for monetary easing rather than a supplementary budget as they believe a fiscal response is much more costly.”

South Korea’s government bonds jumped, driving yields to record lows, and the won weakened after the Bank of Korea decision. The yield on 3.25 percent bonds due June 2015 slid 23 basis points, or 0.23 percentage point, to 2.97 percent as of 2:48 p.m. in Seoul, Korea Exchange Inc. prices show. The won weakened 0.9 percent to 1,151.38 per dollar, according to prices compiled by Bloomberg.

Indonesia Holds

In Indonesia, the central bank kept interest rates unchanged for a fifth month as inflationary risks persist and the currency slumps. Bank Indonesia held its benchmark reference rate at a record-low 5.75 percent.

The European Central Bank cut benchmark borrowing costs last week and the Bank of England raised the size of its asset-purchase program, moves that followed the U.S. Federal Reserve extending the Operation Twist program aimed at lowering long-term interest rates.

In the U.S., some Federal Reserve policy makers have said that more stimulus is likely to be needed to boost the labor market and meet an inflation target, according to minutes of their June meeting released yesterday.

The latest readings on the U.S. economy will come today with data on jobless claims and the Bloomberg Consumer Comfort Index, a measure of confidence. In Europe, economic reports will include inflation in France and industrial production in the euro area.

Australia Jobs

In Australia, employers unexpectedly cut payrolls in June, the first reduction in four months, and the unemployment rate rose to 5.2 percent from 5.1 percent, validating the central bank’s decision to reduce interest rates in May and June.

A report in India showed industrial output rebounded in May from a contraction after the central bank cut interest rates earlier in the year to bolster a weakening economy.

South Korea’s economy may expand 3.3 percent this year, less than a December estimate of 3.7 percent, the Finance Ministry said June 28. The Knowledge Economy Ministry last week cut its estimate for export growth this year to 3.5 percent from a January projection of 6.7 percent, citing a slowdown in major economies.

Weaker demand may cap overseas sales at South Korea’s largest companies, with Samsung Electronics Co. posting second-quarter sales that trailed estimates.

South Korean manufacturers’ confidence fell to the lowest level in four months for July while consumer confidence dropped to a three-month low in June, according to Bank of Korea reports last month. Consumer prices increased 2.2 percent in June from a year earlier, the slowest pace in 32 months.

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