Roundup: S. Korea cuts policy rate to 1.25 pct to help gov't-led restructuring

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 record low of 1.5 percent to a new all-time 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 via a conduit bank for state-run banks that are exposed to massive loans to troubled shipping firms and shipbuilders and need capital to meet the capital adequacy ratio.

Lower expectations for a rate hike in the United States also encouraged the BOK to cut rates further. The Federal Reserve had been initially expected to hike rates as early as this month's rate-setting meeting scheduled for June 14-15, but worse-than-expected employment data in the U.S. reduced such expectations.

Recent economic indicators in South Korea showed a dismal picture. The BOK said in a statement that downside risks to the growth path, forecast in April, became bigger, indicating a downward revision to its 2016 growth outlook which was downgraded from 3.0 percent to 2.8 percent in April.

The country's gross domestic product (GDP) gained 0.5 percent in the first quarter from the previous quarter, posting the lowest quarterly expansion since the second quarter of 2015 when the Middle East Respiratory Syndrome (MERS) hit the Asia's No. 4 economy.

Facility investment tumbled 7.1 percent during the first quarter on a quarterly basis, turning downward for the first time in two years. Consumers, who struggled with economic concerns and refrained from spending money, raised the gross savings rate to 36.2 percent in the quarter, the highest in a year.

Exports, which account for about half of the export-driven economy, fell at a slower pace of 6.0 percent in May on a yearly basis than an 11.2 percent plunge in April, but the outbound shipments maintained a downward trend for 17 months in a row.

Due to the fast fall in exports, the country's current account surplus declined to the lowest in more than two years at 3.37 billion U.S. dollars in April. Endit