South Korea cuts rates to record low as government steps up fight against MERS

Nine people have died since the outbreak of the Middle East Respiratory Syndrome (MERS) was first reported in late May, fuelling public anxiety and hitting spending, with thousands in quarantine and hundreds of schools closed.

Policymakers were already under pressure to adopt more stimulus measures as weak global demand and a strong won dented South Korean exports, while an uncertain outlook discouraged spending from consumers and companies

A Bank of Korea media official announced the monetary policy committee's decision to lower the base rate KROCRT=ECI, without elaborating. Governor Lee Ju-yeol is due to hold a news conference from 11:20 a.m. (2220 ET).

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.

Bond futures <0#KTB:> gave back early modest gains while the won KRW= trimmed some of its losses as Thursday's rate cut was widely seen as marking the end of the current easing cycle, with inflation expected to rebound and household debt growing fast.

"There will be no more rate cuts. If the MERS spread has not occurred, the rate cut would have been a burden for the BOK due to the side-effects of growing household debt," said Peter Park, fixed-income analyst at NH Investment & Securities.

Park expects a supplementary budget soon to help stimulate the economy.

Fifteen out of the 28 analysts surveyed by Reuters had forecast the central bank would lower the rate to 1.50 percent, while the rest saw a steady rate.

Many analysts say the Bank of Korea, which trimmed its growth forecast in April, would have to slash its latest forecast of 3.1 percent growth for 2015 in its July revision.

South Korea's economy grew 3.3 percent last year from 2.9 percent in 2013, but policymakers have said it was still too low compared to an average of 4.5 percent recorded for the five years before the 2008 global crisis.

Comfortably low inflation and a need to tame the won's appreciation against the yen JPYKRW=R have supported further policy easing but the central bank is worried cheaper credit costs would fan the already heavy and growing household debt.

(Additional reporting by Yeawon Choi, Sohee Kim; Editing by Shri Navaratnam)