South Korea Joins India-to-Europe Rate Cuts for Growth: Economy

The Bank of Korea cut interest rates, following the lead of policy makers in Australia, Europe and India this month, as strength in the won and weakness in the yen dim the outlook for the nation’s exports.

Governor Kim Choong Soo and his board lowered the benchmark seven-day repurchase rate to 2.5 percent from 2.75 percent, the central bank said in a statement in Seoul today. Six of 20 economists surveyed by Bloomberg News predicted the move while the remainder forecast no change. Kim supported a cut after opposing one last month.

As central banks around the world move to counter currency appreciation, the won’s 24 percent jump against the yen in six months is hampering South Korean exporters of autos and electronics and aiding their Japanese rivals. In Seoul, ruling New Frontier Party floor leader Lee Hahn Koo yesterday urged a “more active role” for the BOK, adding to political pressure that the central bank resisted last month.

“Japan’s policies must have played a very big role in today’s decision,” said Huh Kwan, a Seoul-based fixed-income trader at Korea Investment & Securities Co., one of South Korea’s 20 primary dealers. “The cut can be seen as action to ease a worsening impact on exports.”

The won was little changed against the dollar, trading at 1,086.65 as of 11:44 a.m. in Seoul. The Kospi stock index rose 0.8 percent.

China, Australia

Across the Asia Pacific region, data gave a mixed picture. China reported inflation below the government’s 3.5 percent target and the steepest decline in producer prices in six months, highlighting weakness in the world’s second-biggest economy. Australian employers added more than four times as many jobs as analysts estimated, sending the local currency higher.

Malaysia is forecast to keep interest rates on hold today. Elsewhere, the Bank of England is projected to keep its target for asset purchases unchanged, while jobless-claims data will be released in the U.S.

Central banks in India and Taiwan may follow with interest-rate cuts and the Philippines may reduce the rate it pays on special deposit accounts, Robert Prior-Wandesforde, an economist at Credit Suisse AG in Singapore, wrote in a note today.

While a reduction in Thailand “is not part of our central scenario, more dovish comments” from the central bank governor today “suggest it would be unwise to rule out a cut altogether,” Prior-Wandesforde said. The baht fell today for the first time this week as speculation mounts that the Bank of Thailand will lower borrowing costs to stem capital inflows.

Currency Gains

As Japan’s monetary easing drives down the yen, nations including Australia, New Zealand and Switzerland are moving to counter currency gains. Sweden’s Finance Minister Anders Borg warned May 7 the krona’s strength is becoming a concern for the nation’s export-oriented economy and called on the central bank to consider that.

Today’s move in South Korea is to bolster the effect of extra government spending, and may help to increase full-year growth to 2.8 percent from the BOK’s April forecast of 2.6 percent, Kim told reporters at a briefing in Seoul. Lawmakers approved a 17.3 trillion won ($15.9 billion) extra budget this week to support the economy and the central bank last month boosted special loans for small firms.

Kim’s officials voted six-to-one today. Last month, when interest rates were left unchanged, the split was four-to-three, the deepest division since 2006. He said that Japan’s “aggressive monetary easing” is having a significant effect on South Korea.

Weak Yen

“What we’re seeing is another round of global easing from Japan to Europe and South Korea needs similar action,” Lee Sang Jae, a Seoul-based economist at Hyundai Securities Co., said before the announcement. “The rate cut will help the nation’s fight against a weak yen.”

South Korea’s economy grew the most in two years in the first quarter as the government front-loaded spending. At the same time, industrial output fell 2.6 percent in March from the previous month, the biggest decline in a year.

European Central Bank President Mario Draghi said May 6 that policy makers are ready to lower interest rates again if needed after reducing them to a record low. The Reserve Bank of Australia cut to a record this week, and India made a reduction last week.

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