People cross the street in front of the Bank of Korea headquarters in Seoul on July 13, 2022. South Korea’s economic growth unexpectedly picked up in the second quarter as strong consumption on Covid-19 restrictions easily offset weak exports, supporting the case for further centers. increase in bank interest rates.
Jung Yeon-je | Afp | Getty Images
South Korea’s central bank on Friday cut its benchmark interest rate by 25 basis points to 3.25% after holding rates for nearly two years.
This is the BOK’s first rate cut since 2020, when the pandemic began sending shockwaves through economies around the world. Economists polled by Reuters had forecast that the BOK would cut rates.
The move comes after South Korea’s inflation rate touched its lowest level in three years, coming in at 1.6% in September, well within the BOK’s target of 2%.
The BOK noted that inflation has “shown a clear stabilization trend” in a statement on Friday, adding that household debt growth has slowed and risks in the foreign exchange market have slightly decreased.
“The board, therefore, judges that it is appropriate to slightly moderate the restrictive monetary policy and examine its impact on this,” the bank said.
Back in August 2021, the BOK began raising rates, increasing by 300 basis points in just 16 months to reach a 15-year high of 3.5% in January 2023.
At the time, South Korea’s inflation was at 2.6%, but it rose sharply to reach 6.3% in July 2022, the highest in more than 20 years.
Park Seok Gil, chief Korea economist at JPMorgan, told CNBC’s Street Signs Asia on Friday that the BOK’s decision could be the start of a cycle of more rate cuts.
“The BOK’s argument for cutting rates is not a response to weak domestic demand, but a normalization of policy stance,” he said.
If the BOK continues “neutralizing” policy stance tightened by about 75 basis points, that will help “beefing of some parts of private consumption growth,” he added.
In an Oct. 4 report ahead of the decision, Morgan Stanley’s Korea chief economist Kathleen Oh said a rate cut was “long overdue,” pointing out that it has been 22 months since the last rate move in January 2023.
Oh noted that macro conditions supported interest rate cuts, against a “favorable” inflation backdrop. “We continue to see muted inflationary pressures since July this year, and inflationary risks appear to have dissipated amid stronger USDKRW and global oil prices,” according to the report.
Furthermore, demand for housing, which Morgan Stanley said is the main factor preventing Cut in the BOK’s monetary policy meeting, has faded, which allows BOK members to become more dovish.
Oh predicted that after a 25-basis-point cut in October, three consecutive cuts would follow each month, eventually bringing the BOK’s benchmark interest rate to 2.5%.
