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2nd LD Writethru: S. Korea cuts policy rate to all-time low of 1.25 pct

Xinhua, June 9, 2016 Adjust font size:

South Korea's central bank unexpectedly cut its policy rate by 25 basis points to 1.25 percent on Thursday, a day after the announcement to create 11 trillion-won (9.5 billion U.S. dollars) funds, mainly covered by the bank, to help restructure shipping and shipbuilding industries.

Bank of Korea (BOK) Governor Lee Ju-yeol and six other policy board members decided to lower the benchmark seven-day repurchase rate from the previous all-time low of 1.5 percent to a new record low of 1.25 percent. It was the first rate cut in 12 months after the bank cut it from 1.75 percent to 1.50 percent in June last year.

The rate cut was an unexpected decision as most of experts predicted a rate freeze. According to a Korea Financial Investment Association (KFIA) survey of 200 fixed-income experts, 79.4 percent of respondents predicted a rate on hold.

The BOK had been under pressures to lower borrowing costs further to tackle possible side effects from the government-led restructuring, including massive layoffs and the weakening of private consumption and facility investment.

Three major South Korean shipbuilders, including Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding and Marine Engineering, submitted self-restructuring plans to cut workforce by 30 percent and facilities by 20 percent each until 2018.

Hyundai Merchant Marine, one of the country's top two shipping firms, completed negotiations on ship-chartering fees and debt-restructuring, but its archrival Hanjin Shipping had yet to finish similar negotiations, the failure of which would result in liquidation of the company.

The unexpected rate cut was aimed at helping tackle possible negative effects from the restructuring. According to the BOK minutes for the May rate-setting meeting, one policymaker expressed need for a rate cut in a foreseeable future as part of pre-emptive measures.

More than 90 percent of the 11 trillion-won restructuring funds will be funded by the BOK loans, which will be provided for state-run banks, such as the Korea Development Bank (KDB) and the Export-Import Bank of Korea (Eximbank) that are exposed to massive loans to troubled shipping firms and shipbuilders and need capital to meet the capital adequacy ratio. Endit