The Bank of Korea lowered its key interest rate to an unprecedented low as it warned that the spread of Middle East respiratory syndrome poses an imminent threat to consumption.
The central bank cut the seven-day repurchase rate to 1.5 percent on Thursday, the fourth reduction since August 2014. The decision was forecast by 11 out of 18 analysts surveyed by Bloomberg. The rest had expected no change.
The MERS outbreak has killed nine South Koreans and put more than 3,000 in quarantine, threatening to damp recent improvement in consumer sentiment in an economy that’s under pressure from a slump in exports. It’s the second straight year that policy makers have had to confront a blow to confidence and spending from unexpected quarters after a ferry-sinking disaster in 2014.
“The cut aims to ease negative impact from MERS and prevent consumer sentiment and production from freezing up,” said Chang Jae Chul, a Seoul-based economist at Citigroup Inc. “The BOK is trying to be more pre-emptive in taking action this time than it was after the Sewol ferry accident last year.”
President Park Geun Hye postponed a U.S. trip to oversee her government’s handling of the outbreak. She has urged her cabinet to prepare “all preemptive measures” to minimize the impact of MERS on the economy.
The finance ministry said in a monthly economic report that it will closely monitor the effects of MERS on consumption and service industries, and will respond if needed. The weakness in exports is delaying a recovery in production and investment, according to the report.
Central Bank Governor Lee Ju Yeol said the rate cut was a pre-emptive move designed to reduce the economic fallout from MERS.
“While household debt has been a long-lasting issue that’s curbed consumption, MERS emerged recently as an imminent risk,” Lee said at a briefing.
Taking the key rate lower, which could further fuel the buildup of household debt, was opposed by one member of the policy board, he said.
MERS is now the biggest variable to Korea’s economic outlook, according to Lee, who flagged the possibility of a reduction in the BOK’s 2015 GDP forecast of 3.1 percent when the next update is made in July.
Other risks cited by Lee and lawmakers include the timing of U.S. interest-rate hikes, an export slump and the harm caused to Korea by the strength of the won versus currencies such as the yen and the euro.
The won strengthened 11 percent against the yen in the past 12 months and traded at 9.01 as of 12:32 p.m. on Thursday. The currency gained 9.8 percent versus the euro and weakened 8.3 percent against the dollar during the same period, data compiled by Bloomberg show.
Overseas shipments fell 10.9 percent in May from a year earlier, the fifth straight drop and the steepest in almost six years. Business lobbies have expressed discomfort over the won’s strength against the yen and its impact on the nation’s competitiveness.
The MERS outbreak comes at a bad time because confidence isn’t yet strong enough to sustain an economic recovery, said Morgan Stanley economists Sharon Lam and Sung Woen Kang. Negative media coverage can take a toll on consumer sentiment, as it did following the sinking of the Sewol ferry last year, they wrote in a report this week.
JPMorgan Chase & Co., Citigroup Inc., and Australia & New Zealand Banking Group Ltd. were among banks that changed their forecasts to a rate cut by July in the past couple of weeks, having earlier predicted the BOK would keep policy steady for the rest of the year.