Bank of Korea reduced the benchmark interest rate in a major move to boost the economy of South Korea, which has been lagging for more than four year.
The decision of the central bank reflects growing concern about slow economic growth despite persistent issues regarding household debt.
After a Friday meeting of the monetary policy panel, Bank of Korea reduced its policy rate to 3.25 percent.
The bank has cut rates for the first time since May 2020. This was when the Covid-19 epidemic hit the country.
The last time the Bank raised rates was in August of 2021 when it increased the rate 0.25 percentage point to combat inflation, rising debt and price increases.
Over the past three years, rates are unchanged.
In a statement, the bank noted that “domestic demand has slowed down, slowing economic growth.”
The central bank explained further that it was possible to cut rates because the inflation rate had begun stabilizing and the household debt level was rising more slowly, as well as signs of cooling in the housing market.
Outlook impacted by domestic demand, global risk
South Korea’s economic future is uncertain, primarily due to global factors.
As a possible risk, the ongoing Middle East crisis is mentioned. This could have implications on fuel prices, currency rates and costs of public utilities.
Bank of Korea has stated that:
The future path of economic growth is likely to be influenced by the pace of recovery in domestic demand, economic conditions in major countries, and trends in information-technology exports.
Risk monitoring despite macroeconomic policies
The bank has warned that, despite a slowdown in the house price and debt of households due to macroprudential measures aimed at maintaining stability financial, risks still remain.
It said that “There is still need to monitor risks related, like the effect of the lower base interest rates on household debt.”
Bank of Korea projects that the Korean economy will grow 2.4% by 2024. This is a small decrease from 2023’s 2.6%.
As new information becomes available, this post South Korea’s Central Bank Cuts Rates for the First Time Since 2020 to Spur Economic Recovery may be updated.
