South Korea seen cutting rates as exports extend slump

SEOUL: South Korea’s central bank is expected to cut its policy rate to a record low on Thursday, as the coronavirus pandemic hits exports in the trade-reliant economy and prospects of a second wave of infections cloud the outlook.

Twelve of 19 analysts surveyed by Reuters expect the Bank of Korea (BOK) to cut its base rate by 25 basis points to 0.5% after a 50 basis point emergency cut in mid-march and new quantitative easing measures.

“The impact of Covid-19 has started materialising in economic indicators in earnest... The economy would take a considerable amount of time to recover, which adds to the case for a 25 basis point cut,” said Paik Yoonmin, fixed-income analyst at Kyobo Securities.

“The government’s third supplementary budget that is on its way also warrants the bank’s coordinated active monetary policy response,” he added.

The country is preparing for a third supplementary budget, most of which would be funded by treasury bonds.

The government is seeking parliamentary approval for the additional budget by June.

Five analysts in the poll, however, said the central bank would not cut rates until later in the year.

“The BOK will likely wait until July after the extra budget plan is finalised in June, as it seeks the best timing for another cut while the financial market has stabilised recently and due to a shake up in the board members,” said Cho Yong-gu, Shinyoung Securities economist.

Thursday’s meeting will be the first for three new members of the seven-member board.

In a separate poll, May exports were expected to plunge 22.1% from a year earlier, following the 25.1% decline seen in April.

“Exports in May will extend a sharp contraction of around 20% due to an inevitable decline in demand from advanced economies such as the United States and the eurozone,” said Chun Kyu-yeon, economist at Hana Financial Investment.

“But considering strong shipments of semiconductors and improvement in China-bound sales, Korean exports will gradually improve,” she added.