Bank Of Korea Trims Rates To 3.00%

(RTTNews) - The Bank of Korea on Thursday elected to pare interest rates by 25 basis points to 3.00 percent from 3.25 percent after 12 straight meetings with no change.

The decision came as a surprise, particularly since inflation remains well within the central bank's target range and producer prices now rest at a 32-month low.

But slowing conditions in the global economy - particularly in the United States and in Europe - prompted the bank to provide further stimulus.

"The Committee considers some economic indicators in the US to have shown signs of deteriorating, and the sluggishness of economic activities in the euro area to have deepened," the minutes said. "Growth in emerging market countries as well has continued to slow, mostly on sluggish exports. Going forward the Committee expects the pace of global economic recovery to be more moderate than originally forecast, and judges the downside risks to growth to be intensifying further."

Consumer prices were up 2.2 percent on year in June, below forecasts for 2.5 percent, which would have been unchanged from the May reading. Inflation now inches toward the lower end of the central bank's target range of 2 to 4 percent.

On a monthly basis, consumer prices eased 0.1 percent versus expectations for a gain of 0.2 percent - which also would have been unchanged.

Core CPI was up 0.3 percent on month and 1.5 percent on year after collecting 0.2 percent on month and 1.6 percent on year in the previous month.

Producer prices were up 0.8 percent on year in June, touching a 32-month low. The June reading follows the 1.9 percent increase on year in May and the 2.4 percent annual jump in April.

On a monthly basis, producer prices plunged 1.4 percent following the 0.6 percent contraction in May.

"The Committee forecasts that inflation will remain below the midpoint of the inflation target for the time being, despite pressures to hike public utility fees for instance," the minutes said.

There was also some slowing on the domestic front.

South Korea's trade surplus hit its highest level in 20 months in June as exports recovered after three months of declines. The trade balance was in a surplus of $4.96 billion in June, the highest since October 2010. In May, the trade surplus was $2.26 billion. The trade balance has now showed a surplus for five consecutive months.

After falling for three straight months, exports rose 1.3 percent from a year earlier in June to $47.35 billion. Imports, meanwhile, shrank 5.4 percent annually to $42.39 billion.

In addition, South Korea's manufacturing sector contracted in June for the first time in five months. The Purchasing Managers' Index for manufacturing fell to 49.4 in June from 51 in the previous month. The composite indicator designed to provide a single-figure snap-shot of the health of the manufacturing sector suggests contraction.

"The Committee appraises the trend of economic growth to have weakened more than originally anticipated, with the rates of growth in exports and domestic demand remaining at low levels," the minutes said. "The Committee anticipates that the domestic economy will sustain a negative output gap for a considerable time going forward, due mostly to the increase in euro area risks and the sluggish economies of its major trading partners."

The central bank had unexpectedly hiked interest rates by 25 basis points at its June 2011 meeting and left the policy unchanged since then.

"Looking ahead, the Committee, while closely monitoring external risk factors and the consequent changes in financial and economic conditions at home and abroad, and also continuing its efforts to lower inflation expectations, will conduct monetary policy so as to stabilize consumer price inflation at the midpoint of the inflation target over a medium-term horizon amid continuing sound growth of the economy," the minutes said.

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