South Korea’s economy has been hit by a trade spat with Japan as well as the China-US tariffs row (Ed JONES)

Seoul (AFP) – South Korea’s central bank on Wednesday cut its key interest rate to the lowest point in two years in an effort to prop up its slowing economy as it is hit by a trade spat with Japan.

The move comes as President Moon Jae-in battles to kickstart inflation — after prices fell for the first time last month — and boost the stuttering economy, with parliamentary elections due in six months.

It also makes the Bank of Korea the latest central bank to slash rates around the world as officials try to prop up their economies in the face of a global slowdown.

The BoK lowered its key rate to 1.25 percent from 1.5 percent, citing contraction of global trade and “sluggishness in exports and facilities investment”. 

Borrowing costs are now level with their previous record low, which was seen between June 2016 and November 2017. The won fell 0.2 percent against the dollar in afternoon trade.

“As it is expected that domestic economic growth will be moderate and it is forecast that inflationary pressures on the demand side will remain at a low level, the Board will maintain its accommodative monetary policy stance,” said the central bank in a statement. 

The rate cut comes as the World’s 11th largest economy struggles from a prolonged trade row between the US and China as well as Seoul’s standoff with Tokyo originating from historical dispute. 

The two neighbours have been embroiled in a dispute since July, when Japan tightened export controls on three chemicals essential to key products of South Korean tech companies such as Samsung.

While both are key US allies in the region, relations between the two remain heavily affected by Japan’s expansionism in the first half of the 20th century, including its colonisation of the peninsula.

Consumer price inflation is expected to hover around zero “for some time” before rising to the one percent range from next year, the central bank said, far short of its target of two percent. 

Analysts warn that South Korea may be entering deflation territory after prices dropped 0.4 percent on-year in September, the first negative reading on record.  

The BoK said economic growth is expected to “fall below” the 2.2 percent projection made in July — the downgrade from an earlier projection of 2.5 percent.  

GDP grew 2.7 percent in 2018, the weakest pace in six years. 

Disclaimer: Validity of the above story is for 7 Days from original date of publishing. Source: AFP.