June 5, 2015 / 9:18 AM / 5 years ago

South Korea MERS outbreak heightens pressure for rate cuts

SEOUL, June 5 (Reuters) - An outbreak of a deadly respiratory disease in South Korea could hurt consumer spending and tourism and is ramping up the pressure on the nation’s central bank to cut interest rates as early as next week, a central bank source said.

“I have a feeling that the outbreak increases the pressure for a cut,” a Bank of Korea official told Reuters. The official is not a voting member of the policy committee that will meet on June 11.

Investors and analysts are worried that the spread of Middle East Respiratory Syndrome could deal a damaging blow to an already-tottering economy. They are wagering on a rate cut next week, and for fresh government stimulus worth billions of dollars.

With four deaths and 41 cases, the spread of MERS in South Korea is the worst outbreak outside of the Middle East - forcing authorities to close more than 1,000 schools, step up airport screenings and sowing fear among residents who have begun stocking up on surgical masks.

Park Sang-young, an automobile dealer in a city north of Seoul, says the MERS scare has seen customer numbers in many of the city’s restaurants shrivel dramatically. “I can get a seat easily now at a place where I used to wait in a long queue for about 30 minutes.”

The BOK official said the central bank had previously been expecting consumer spending to pick up, but MERS raises some uncertainty on the outlook. “It’s too soon to know how it will affect the economy.”

CONSUMPTION PINCH

All the same, the anecdotal evidence points to more headwinds to growth.

Retailers in Gyeonggi province, which surrounds Seoul and houses the hospital with the most infections, reported slower sales this week. Turnover at Lotte Department Store’s outlet in the city of Suwon was down 10 percent from last week, a company official said.

As of Wednesday, 11,800 visitors, mostly from mainland China, Hong Kong and Taiwan, had cancelled trips to South Korea, the Korea Tourism Organisation said.

That is bad news for Asia’s fourth-biggest economy, which is struggling for momentum in the face of a collapse in exports and slow consumer and corporate spending. Tourism and related service businesses account for more than 5 percent of the $1.4 trillion economy.

“This illness absolutely increased pressure on the policymakers to take action swiftly and we see chances growing for an interest rate cut next week,” said Yoon Yeo-sam, a fixed-income analyst at Daewoo Securities.

The Bank of Korea has cut the policy interest rate by a combined 150 basis points in six steps since the middle of 2012 to a record low of 1.75 percent, with the last cut delivered in a surprise move in March.

GROWTH FORECASTS DOWNGRADED

The Asian Development Bank estimated that the economic impact of the much-wider outbreak of Severe Acute Respiratory Syndrome (SARS) in 2002-2003 was around $18 billion in East Asia, or about 0.6 percent of gross domestic product.

With Seoul’s 3.7 percent growth target for this year looking increasingly unrealistic, and private estimates being cut to as low as 2.5 percent, policy action may be inevitable even as there are concerns that more rate cuts could fuel rising household debt.

There is also talk of stepped up government stimulus although the finance ministry denied a newspaper report late on Thursday that it plans a 20 trillion won ($18.00 billion) supplementary budget, equivalent to 1.3 percent of annual gross domestic product.

“On the heels of the dismal May export report, any economic hit from MERS adds to the case for the BOK to cut and we bring forward our forecast of the next BOK rate cut to next Thursday,” said Tim Condon, economist at ING in Singapore.

$1 = 1,111.1500 won Additional reporting by Christine Kim and Joyce Lee; Editing by Tony Munroe & Shri Navaratnam

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