South Korea’s central bank unexpectedly lowered its key interest rate yesterday, urgently attempting to guard Asia’s fourth-largest economy against Europe’s persistent debt woes and slowing growth in China. The Bank of Korea said its seven policymakers cut the benchmark seven-day repurchase rate by a quarter of a percentage point to 3 percent. The decision mirrors similar moves by policymakers in Europe and China to stave off a recession, but surprised most market watchers, who forecast a rate freeze.
“We expect the rate cut will help the South Korean economy return to a long-term growth trend,” Bank of Korea Governor Kim Choong-soo said.
Without lowering borrowing costs, that would boost spending among businesses and consumers, policymakers believed the South Korean economy would likely underperform, Kim added.
The central bank said some economic indicators in the US have shown signs of deterioration and the sluggishness of economic activities in the eurozone has deepened. Economic growth in South Korea will be weaker than previously expected as exports and domestic demand, two key growth engines, both remain at low levels.
“Going forward, the committee expects the pace of global economic recovery to be more moderate than originally forecast, and judges the downside risks to growth to be intensifying further,” the monetary policy committee said in a statement.
South Korea joins other central banks in monetary easing. Last week, the European Central Bank cut its key interest rate by a quarter of a percentage point to a record low in an effort to boost its sagging economy. China’s central bank also lowered its key interest rate for a second time in a month.
South Korea’s electronics and automakers are bracing for weak demand overseas for the rest of the year. Samsung Electronics Co, the world’s largest maker of televisions, mobile phones and memory chips, reported last week that its second-quarter sales fell short of market expectations. South Korea’ finance ministry said last month that it expected the economy to expand 3.3 percent this year from last year, below an earlier forecast of 3.7 percent.
Market analysts said the Bank of Korea was likely to further ease its monetary policy ahead of December presidential elections because its focus now seems to have moved to growth over price stability.
“The governor said lower interest rates will ease burden from household debts. He also said the country’s output growth was expected to stay below its potential for a while,” Daewoo Securities analyst Yoon Yeo-sam said. “So there is an increased chance of additional rate cut.”
This month’s rate cut was South Korea’s first since February 2009, when the central bank lowered its policy rate by 50 basis points to a record low of 2 percent in the wake of global financial turmoil. The bank raised key interest rates in five steps between July 2010 and June last year to 3.25 percent, as low borrowing costs built up inflationary pressure. The central bank had refrained from raising its policy rate for more than a year because worries about global economic uncertainty re-emerged with escalating public debts in Europe. However, stubbornly high inflationary pressure left little room to stimulate the economy through monetary easing.