The Bank of Korea (BOK) has now cut its rate by 50 basis points this year following a surprise 25 point cut in March.
South Korea has been hit by an outbreak of the rare Middle East Respiratory Syndrome, with the total number of deaths so far at nine. The outbreak, which has hit consumption and tourism, is the largest outside Saudi Arabia where the virus was discovered in 2012.
South Korea's manufacturers have been struggling with weak exports and the country's Gross Domestic Product expanded by only 0.8 percent in the first quarter, for annual growth of 2.5 percent, down from 2.7 percent in the previous quarter, and the weakest growth rate since the first quarter of 2013.
While consumer price inflation picked to 0.5 percent in May from 0.4 percent in the two previous months, the BOK said it still expects inflation to continue at a low level due to the impact of low oil prices.
The Bank of Korea (BOK) issued the following statement:
"The Monetary Policy Committee of the Bank of Korea decided today to lower the Base Rate by 25 basis points, from 1.75% to 1.50%.
Based on currently available information the Committee considers that the US appears to be emerging from its temporary economic slowdown and the improvements in the euro area have continued as well. In emerging market countries including China the trends of slowing growth have continued. The Committee forecasts that the global economy will sustain its modest recovery going forward, centering around advanced economies such as the US, but judges that the possibility exists of its being affected by changes in the monetary policies of major countries, by the weakening of economic growth in emerging market countries, and by uncertainties over the restructuring of Greek debt.
Looking at the Korean economy, the Committee notes that the trend of decline in exports has accelerated and that consumption, which had been showing a recovery, appears to have contracted since the outbreak of Middle East Respiratory Syndrome (MERS). On the employment front, the unemployment rate has risen due mainly to an expansion in job search activities, but the employment-to-population ratio has also increased as the number of persons employed has grown. The Committee judges that the downside risks to the domestic growth path forecast in April have expanded, owing mostly to the sluggishness of exports and to the impacts of the MERS outbreak.
Consumer price inflation rose slightly from 0.4% the month before to 0.5% in May, due mainly to increases in prices of agricultural, livestock and fisheries products, and core inflation excluding agricultural and petroleum product prices also rose slightly to 2.1%, from 2.0% in April. Looking ahead the Committee forecasts that inflation will continue at a low level, due mainly to the effects of the low oil prices. In the housing market, the upward trends of sales and leasehold deposit prices have continued in both Seoul and its surrounding areas and the rest of the country.
In the domestic financial markets, influenced mostly by strengthened expectations of a policy rate hike by the US Federal Reserve, stock prices have fallen and the Korean won has depreciated against the US dollar. The won has fluctuated within a certain range against the Japanese yen. Long-term market interest rates have fallen back, after having risen in response mainly to interest rate movements in major countries and to domestic economic indicators. Bank household lending has sustained a trend of increase at a level substantially exceeding that of recent years, led by mortgage loans.
Looking ahead, while working to sustain the recovery of economic growth, the Committee will conduct monetary policy so as to maintain price stability over a medium-term horizon and pay greater attention to financial stability. In this process it will closely monitor the trend of increase in household debt and external risk factors such as shifts in major countries’ monetary policies, as well as the trends of capital flows."