South Korea Cuts Key Rate as MERS Emerges as Threat to Recovery

Analysts initially expected the central bank to leave the policy rate unchanged but that view changed this month as the MERS outbreak caused panic in South Korea.

Published: 11th June 2015 05:08 PM  |   Last Updated: 11th June 2015 05:08 PM   |  A+A-

MERS_S Korea

Photo for representational purpose only. |AP


SEOUL, South Korea: South Korea's central bank lowered its key interest rate to a historic low on Thursday, responding to a slump in exports and the prospect the economy will be hurt by the outbreak of the deadly MERS virus. Officials insist that the disease, which has killed 10 people, has peaked.

Bank of Korea policymakers cut the policy rate by a quarter of a percentage point to 1.5 percent, the second rate cut this year. In March, the bank lowered the key rate and downgraded its growth forecast for Asia's fourth-largest economy as exports continued to slump.

Consumption was on track to recover but began showing signs of contraction after the outbreak of Middle East respiratory syndrome last month, while the decline in exports widened, the central bank said in a statement.

Exports and imports continued to drop over a year earlier after the March rate cut due to sluggish global demand and a weak Japanese yen. The cheaper yen hurt Korean exporters, especially automakers that compete with Japanese rivals in the global market.

Analysts initially expected the central bank to leave the policy rate unchanged but that view changed this month as the MERS outbreak caused panic in South Korea. The outbreak has killed 10 and infected more than 120 people since the first case, a 68-year-old man who had travelled to the Middle East, was diagnosed on May 20. The latest death was reported Thursday.

Most of the deaths so far have been of people who had been suffering from pre-existing medical conditions, such as respiratory problems or cancer. About 3,800 people remained isolated Thursday after possible contact with infected people, according to the Health Ministry.

The MERS outbreak could hurt businesses and dent consumption as travelers cancel trips and people stay home out of worries of contagion. Industries that count Chinese tourists as key customers, such as airlines and cosmetics, are likely to be worst hit.

More than 2,600 schools and kindergartens across South Korea were closed on Thursday. On Wednesday, experts from the World Health Organization and South Korea urged their reopening as the outbreak in the country has so far been contained to hospitals and there is no evidence of sustained transmission in the community.

South Korean officials believe the outbreak may have peaked, although they say the next few days will be crucial to determining whether their efforts to isolate patients and stymie the disease have worked. President Park Geun-hye postponed her planned U.S. visit scheduled for next week to focus on coping with the outbreak.

Experts think MERS can spread in respiratory droplets, such as by coughing. But transmissions have mainly occurred through close contact, such as living with or caring for an infected person.

MERS has mostly been centered in Saudi Arabia and has a death rate of about 40 percent. It belongs to the family of coronaviruses that includes the common cold and SARS, and can cause fever, breathing problems, pneumonia and kidney failure.


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