S. Korea lowers policy rate by 25 bps after U.S. rate cut, slower inflation

South Korea's central bank on Friday lowered its policy rate by 25 basis points following an interest rate cut in the United States and slower inflation at home.

Bank of Korea (BOK) Governor Rhee Chang-yong and other monetary policymakers decided to slash the benchmark seven-day repurchase rate by a quarter percentage point to 3.25 percent.

It marked the BOK's first rate cut in nearly four and a half years since May 2020, after keeping the key rate on hold for the 13th straight time since January 2023.

The central bank had delivered policy rate hikes by 3.0 percentage points between August 2021 and January 2023.

The BOK's rate cut was in line with market expectations. According to the Korea Financial Investment Association's poll of 100 fixed-income experts, 64 percent predicted the rate reduction this month.

The eased monetary policy came after the U.S. Federal Reserve's rate cut by 50 basis points and the slower headline inflation domestically.

The Fed cut its target range for the federal funds rate by half a percentage point to 4.75-5.00 percent in September.

South Korea's consumer prices rose 1.6 percent in September from a year earlier, falling below the BOK's mid-term inflation target of 2 percent in three and a half years since March 2021.

The headline inflation had roughly been on the decline after peaking at 6.3 percent in July 2022.

The unexpected gross domestic product (GDP) contraction encouraged the central bank to ease its monetary policy stance.

Real GDP, adjusted for inflation, contracted 0.2 percent in the second quarter from three months earlier after soaring 1.3 percent in the first quarter.

It led the BOK to revise down this year's economic growth outlook by 0.1 percentage point to 2.4 percent in August.

The BOK's monetary policy easing, however, could be restricted amid lingering uncertainties over massive household debt.

Debt owed by households to deposit-taking banks expanded 5.7 trillion won (4.2 billion U.S. dollars) in September, continuing to grow for the sixth straight month on strong demand for mortgage loan.

Five of the six monetary policy board members maintained that the key rate should be kept on hold at 3.25 percent for the next three months, while one member opened door for a rate cut within three months, BOK Governor Rhee told a press conference.

Uncertainty also remained over the headline inflation on the back of fluctuations in farm produce prices and volatility in global crude oil prices, affected by geopolitical risks in the Middle East.

The still high borrowing costs would increase the debt-servicing burden for households struggling with record-high debts that negatively influence domestic consumer spending.

(Source: Xinhua)

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