Business

Asian share markets fall after central bank actions

  • 12 July 2012
  • From the section Business

Asian shares have fallen after South Korea unexpectedly cut interest rates while the Bank of Japan made only minor changes to its stimulus programme.

South Korea Kopsi shares index fell 2.2% after the Bank of Korea cut its key interest rate to 3% from 3.25%, the first reduction for three years.

The action raised fears that the economic outlook had worsened sharply.

Japan's main Nikkei index lost 1.5% on disappointment that the Bank of Japan had barely changed its monetary policy.

Hong Kong's Hang Seng index was down more than 2% and Sydney's All Ordinaries index was 0.7% lower.

The Bank of Japan kept its key interest rate at between zero and 0.1% - as expected, but it also failed to expand the size of its asset-buying programme, something that also acts as a device to stimulate growth.

It kept the total size of its asset-buying and lending programme at 70 trillion yen ($879bn), although it made minor changes to the composition of the programme.

Japan also cut its inflation projection to 0.2% from 0.3% and also lowered its growth forecast for the year to March from 2.2% from 2.3%.

Sluggish growth

The rate cut in South Korea is the latest in a number of recent moves by central banks to ease policy.

It follows rate cuts by Brazil on Wednesday, and by the European Central Bank and China's central bank last week.

"Lower interest rates should make it easier for [South Korea's] domestic economy," said Richard Jerram, chief economist at Bank of Singapore.

"It may also take some of the steam out of the exchange rate which has been quite firm for the last month or two. A strong exchange rate does reduce your export competitiveness so this should help."

Korea is a very export dependent economy, and slowing demand from key markets such as Europe has been a worry.

In a statement the Bank of Korea said: "In Korea, 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."

Last month, the finance ministry cut its growth forecast for 2012 to 3.3% from a previously projected 3.7%.

Global uncertainty

The central bank also said it expected the pace of the global economic recovery to be slower than originally anticipated.

It said downside risks to growth were intensifying "due chiefly to the high degree of uncertainty surrounding the euro area fiscal crisis and to the possibilities of international financial market unrest and economic slumps in major countries".

In the US, some policy makers at the Federal Reserve have suggested that more stimulus may be needed in coming months to shore up the labour market, according to the minutes of their June meeting released on Wednesday.

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