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Economy

South Korea cuts key rate to record low 0.5% to fight COVID-19 hit

Central bank slashes economic forecast to contraction of 0.2% this year

The 25 basis point cut has lowered the benchmark rate to its lowest point since the Bank of Korea adopted its current policy system in 1999.   © Reuters

SEOUL -- The Bank of Korea cut its key interest rate to a record low 0.5% on Thursday in a bid to cushion economic damage from the coronavirus pandemic.

Underscoring the scope of that hit, the central bank also forecast that gross domestic product will contract 0.2% this year, a sharp reversal from its previous projection for growth of 2.1%.

The BOK said its seven-member monetary policy board lowered its benchmark rate by 25 basis points, or 0.25 percentage point, as domestic economic activity has slowed significantly. The bank said that the country faces multiple challenges in the form of weak consumption, falling exports, low investment and a poor job market.

"We expect the local economy will continue to have weak momentum pressured by the COVID-19 pandemic," the BOK said in a statement. It said GDP would come in at "around zero percent this year, with uncertainties for the growth direction being very high."

BOK Gov. Lee Ju-yeol said the contraction could be bigger than forecast. "The U.S.-China conflict is raising uncertainties in the global economy. It is negative to investment and trade. It also limits export recovery. It is hard to predict how the conflict will develop."

The decision comes two weeks after the South Korean government released April employment data that showed a loss of 476,000 jobs from a year ago, the largest decline since February 1999 when the country was in the throes of the Asian financial crisis.

Analysts say that the BOK cut the rate to complement the expansionary fiscal policy being pursued by South Korean President Moon Jae-in's government. It plans to soon create a third supplementary budget after releasing 130 trillion won ($105 billion) of stimulus to fight the economic downturn.

"The Korean government and the BOK have together introduced an unprecedented policy package," said Marie Kim, an economist at Citi Research, noting that the central bank has committed "to provide unlimited short-term liquidity to the financial sector."

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