Pedestrians cross the road in front of the Bank of Korea headquarters in Seoul on July 13, 2022. .
Jung Yeon-je | AFP | Getty Images
The Bank of Korea lowered its benchmark interest rate by 25 basis points to 3.25%. This is the first rate cut by the Bank of Korea since the Federal Reserve began to tighten monetary policy in March 2022.
That’s consistent with a Reuters poll of economists predicting a rate cut.
The move comes after South Korea’s inflation hit its lowest level in more than three years. Growth in September was 1.6%far below the Bank of Korea’s 2% target.
The Bank of Korea noted that inflation “shows a clear stabilizing trend” statement On Friday, he added that household debt growth had slowed and risks in foreign exchange markets had eased.
“The board therefore considers it appropriate to relax restrictive monetary policy and study its future implications,” the bank said.
As early as August 2021, the Bank of Korea began to raise interest rates, raising interest rates by 300 basis points in just 16 months, reaching a 15-year high of 3.5% in January 2023.
South Korea’s inflation rate was 2.6% at the time, but it climbed sharply to 6.3% in July 2022, the highest level in more than 20 years.
Park Seok Gil, chief Korea economist at JPMorgan Chase, told CNBC’s Street Signs Asia on Friday that the Bank of Korea’s decision could be the start of a broader cycle of interest rate cuts.
“The Bank of Korea’s rationale for cutting interest rates is not to respond to weak domestic demand but to normalize its policy stance,” he said.
If the Bank of Korea continues to “neutralize” its tightening stance by about 75 basis points, it will help “strengthen some parts of private consumption growth,” he added.
In an Oct. 4 report before the decision, Morgan Stanley chief Korea economist Kathleen Oh said the rate cut was “long awaited,” noting that 22 months had passed since the last rate cut in January 2023. months.
Oh noted that the macro environment is conducive to interest rate cuts and the inflation backdrop is “favourable.” The report said, “Since July this year, we have continued to see weak inflationary pressures, and with the strength of the U.S. dollar, Korean won and global oil prices, upward risks to inflation appear to have receded.”
In addition, Morgan Stanley said that housing demand is the main factor preventing the Bank of Korea from cutting interest rates at its monetary policy meeting, but housing demand has weakened, making Bank of Korea members more dovish.
Oh expects the Bank of Korea to cut interest rates three times in a row on a quarterly basis, following its 25 basis point cut in October, eventually lowering the benchmark interest rate to 2.5%.
