South Korean Rate Swaps Decline to Record After BOK Eases Policy

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South Korea’s interest-rate swaps sank to a record and bonds fell after the central bank cut borrowing costs to an unprecedented level to boost economic growth.

The Bank of Korea lowered its seven-day repurchase rate to 1.50 percent from 1.75 percent Thursday following a similar reduction in March. The decision was predicted by 11 of 18 economists surveyed by Bloomberg, while the rest saw no change. The move cames as the spread of the Middle East Respiratory Syndrome, which has left nine dead and put more than 3,000 in quarantine, and falling exports threaten an economic recovery.

The cost of locking in borrowing costs for a year fell five basis points to 1.63 percent as of 3:39 p.m. in Seoul, data compiled by Bloomberg show. The yield on three-year sovereign notes climbed two basis points to close at 1.80 percent, according to Korea Exchange prices.

“The cut in the policy rate drove swaps down,” said Shin Dong Jun, chief strategist at Hana Daetoo Securities Co. in Seoul. “We expect the BOK to stay on hold for the next 12 months, so the short-end IRS are likely to stabilize at current levels.”

Central bank Governor Lee Ju Yeol said the decision wasn’t unanimous, with one of the seven voting members seeking a hold. He said the board agreed on the need for structural reforms to boost the economy’s growth potential.

The won fell 0.1 percent to close at 1,108.58 a dollar, data compiled by Bloomberg show. The currency has weakened 1.6 percent in 2015.

President Park Geun Hye postponed a U.S. trip to oversee her government’s handling of the outbreak. She asked her cabinet on Tuesday to prepare preemptive measures to minimize the impact of MERS virus on the economy. Park also called for steps to revive exports as the won’s recent rise to a seven-year high against the yen hurts shipments.

The MERS outbreak poses the risk of direct and imminent damage to domestic consumption, and the rate cut was a preemptive move to mitigate its impact, Governor Lee told reporters after the policy decision.

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