South Korea Cuts Interest Rates

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South Korea Cuts Interest Rate to Historic Low

In response to a declining economy, South Korea cuts its interest rate to a historic low. As of June 11, South Korea’s Central Bank cut the key interest rate to 1.5 percent. This is the second time this year the Central Bank has lowered the interest rate — it was lowered to 1.75 percent in March. It was also lowered a couple times in 2014. Policy makers hope this change will help balance the economy in the most effective and productive way.

There are a couple major factors that influenced South Korea to cut the interest rate to a historic low. For one, household debt is increasing in the country.

Another factor is exports. The amount of South Korean exports has fallen significantly. More specifically, exports are down around 11 percent from 2014. This is major because the country is currently driven by exports, and is the sharpest drop in six years, even though there has been job growth and higher wages.

Additionally, South Korea is facing tough competition with other Asian countries. For example, due to Japan’s weakening yen, its products (like cars and electronics) tend to me more attractive than South Korean products. Another hit comes from China, where many manufacturers are using home as a base to create products.

However, the biggest factor that influenced South Korea to cut its interest rate to a historic low is related to MERS (Middle East Respiratory Syndrome).

There were 14 new cases of MERS when the interest rate cut was announced. As of June 18, there were 24 reported deaths and a vaccine is not available. “We decided to cut rates today in a pre-emptive move to contain the economic fallout from MERS,” said the bank’s Governor Lee Ju-yeol to the media.

MERS has the potential to have a huge negative impact on South Korea’s economy. Since the most cases of MERS outside of Saudi Arabia have happened in South Korea, locals and tourists alike have been affected.

For locals, thousands of schools have been shut down, which has caused concern. Similarly, the threat of MERS is expected to deter tourists for visiting and spending money. Already in just a month, more than 54,400 tourists have decided not to follow through on travel plans to South Korea, according to The Wall Street Journal. With both locals and tourists staying it home, billions of dollars are at stake.

Within the past few years, South Korea has consistently lowered its benchmark interest rate. Will this trend continue? Krystal Tan, Asia economist at Capital Economics, does not think so. Or, if it were to happen, growth outlook would have to deteriorate dramatically “given that it is still worried that the acceleration in household debt growth could pose a threat to financial stability,” she told CNBC.

Undoubtedly, South Korea has a good amount of challenges to face and work through in order to improve the country’s economy. The goods news is, it looks like the country is willing to put in the work and make decisions, as shown by South Korea cutting its interest rate to a historic low.