MERS forces Korea central bank to cut rates to record low

People wearing face masks in South Korea.
Ed Jones | AFP | Getty Images
People wearing face masks in South Korea.

South Korea's central bank has cut its policy rate by 25 basis points to a record-low 1.5 percent to offset any potentially harmful economic effects from an outbreak of the Middle East Respiratory Syndrome (MERS).

A Bank of Korea media official announced the monetary policy committee's decision to lower the base rate without elaborating. Governor Lee Ju-yeol is due to hold a news conference later this morning.

It was the fourth rate cut in less than a year and the seventh since the current easing cycle began three years ago as the trade-reliant economy, the fourth-largest in Asia, has struggled for traction over the past year.

How the MERS outbreak is hurting South Korea
How the MERS outbreak is hurting South Korea   

Fifteen out of the 28 analysts surveyed by Reuters had forecast the central bank would lower the rate to 1.5 percent, while the rest saw a steady rate.

Krystal Tan, Asia economist at Capital Economics, said that the MERS outbreak could stop Korea's economic improvement in its tracks in the short term. She noted the downturn in tourism to South Korea and the fact that the outbreak had come at a time when exports were struggling.

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At present, however, Tan said there would have to be a severe deterioration in the growth outlook for the BOK to cut rates further "given that it is still worried that the acceleration in household debt growth could pose a threat to financial stability".

Nine people have died since the outbreak was first reported in late May, fueling public anxiety and hitting spending, with thousands in quarantine and hundreds of schools closed.

South Korea's Kospi index held on to modest gains, while the South Korean won weakened as much as 0.3 percent to 1,113.1 versus the U.S. dollar following the central bank's monetary policy decision.