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(2nd LD) BOK unexpectedly cuts key rate to 3 pct

11:59 July 12, 2012

(ATTN: REWRITES lead; UPDATES with remarks by BOK chief in paras 5-10)
By Kim Soo-yeon

SEOUL, July 12 (Yonhap) -- South Korea's central bank cut the key interest rate for the first time in more than three years on Thursday, underscoring its urgency to cushion the bitter impact of the eurozone debt crisis on the local economy.

Bank of Korea (BOK) Gov. Kim Choong-soo and his six fellow policymakers lowered the benchmark 7-day repo rate by a quarter percentage point to 3 percent for July. It marked the first rate cut since February 2009.

The decision, which was not unanimous, came as a surprise to the market as only one out of 15 analysts predicted a rate cut for July in a survey by Yonhap Infomax, the financial news arm of Yonhap News Agency.

The BOK slashed the key rate by 3.25 percentage points to a record low of 2 percent between October 2008 and February 2009 to fight global financial turmoil. The bank raised it by five steps between July 2010 and June 2011 to curb inflationary pressure.

The rate cut followed several central banks' recent moves to lower interest rates, indicating that the global economic outlooks are getting cloudy, hit by the eurozone debt crisis.

The governor presented a bleaker economic outlook than the previous month, saying downside risks to growth are intensifying further.

"The monetary policy committee hopes the rate cut will help the Korean economy return to a long-term growth trend," Kim told a press conference.

"The output gap is expected to remain in negative territory for a considerable period of time ... Consumer inflation is expected to run below the central bank's median inflation target (of 3 percent) for the time being."

The governor did not flag further rate cuts, saying the July decision aims to support weakening economic growth as external economic conditions deteriorate.

"The decision does not mean that the BOK is shifting its monetary policy direction," he said.

Following the rate cut, bond futures gained ground and the local currency extended its weakness to the dollar in the morning session.

"The BOK's rate reduction points to the pressure facing the bank to support weakening growth," said Lee Sang-jae, a senior economist at Hyundai Securities Co. "Easing inflationary pressure also seemed to lend support to the rate cut decision."

Lee said an additional rate cut is not likely to come this year unless external economic conditions turn even worse.

The European Central Bank and China's central bank cut their interest rates last week in a desperate effort to bolster the softening economy, dogged by the eurozone fiscal crisis.

The Bank of England vowed to increase its asset-purchase program and market players are awaiting whether the Federal Reserve will take additional unconventional easing steps.

The eurozone debt woes have eaten into South Korea's exports, raising expectations that Korea's second-quarter growth is estimated to have cooled down from 0.9 percent on-quarter growth in the first quarter.

Reflecting the fallout from the eurozone risks, the government revised down its 2012 growth forecast to 3.3 percent from its earlier estimate of 3.7 percent. It also announced plans to increase spending by 8.5 trillion won (US$7.5 billion). The BOK, whose 2012 growth forecast stands at 3.5 percent, plans to unveil revised numbers on Friday.

As for inflationary pressure, South Korea saw the growth of its headline inflation slow to the 2-percent range for the fourth straight month in June. The country's annual inflation growth hit a 32-month low of 2.2 percent in June, below the BOK's median inflation target of 3 percent.

Analysts said that the BOK's rate cut is the response to the weakening economic growth, but the bank also cannot escape criticism that it should have normalized the policy stance faster to secure enough room to cut rates in the face of the global economic headwinds.

"The previous level of 3.25 percent was not even a neutral level of the key rate," Lee Sung-kwon, a senior economist at Shinhan Investment Corp., said before the decision.

"The BOK cannot evade criticism that it has been behind the curve in raising the rate so far even if this month's rate cut aimed to bolster the economy."



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