FX.co ★ Bank Of Korea Cuts Key Rate For First Time In More Than 4 Years

The Bank of Korea reduced its base rate for the first time in over four years this Friday, aiming to invigorate the economy amidst declining inflation levels—the lowest since early 2021—and a deceleration in household debt due to stringent macroprudential policies. Led by Rhee Chang Yong, the Monetary Policy Board decided to lower the Base Rate by 25 basis points, taking it down to 3.25 percent from the previous 3.50 percent.

The board concluded that it is prudent to slightly ease the restrictive monetary policy and monitor the subsequent outcomes. Notably, one member, Chang Yongsung, dissented, opting to keep the rate steady at 3.50 percent. This cut follows a prolonged streak of thirteen meetings without a policy rate change and represents the first reduction since May 2020. Rhee described the move as a "hawkish cut," suggesting a cautious approach towards rate reduction.

In September, consumer price inflation dropped to 1.6 percent, the lowest since February 2021, primarily driven by a substantial fall in petroleum prices and the base effect. The central bank anticipates inflation will slip slightly below the earlier projection of 2.5 percent this year, influenced by downward pressure from supply-side factors. Core inflation is expected to remain stable, hovering around 2 percent.

The economy contracted by 0.2 percent in the second quarter due to waning consumption and investment. Policymakers noted an increase in uncertainties concerning the economic growth forecasts of 2.4 percent for this year and 2.1 percent for 2025, attributed to sluggish domestic demand recovery.

Additionally, the bank expects housing prices in the Seoul region and household debt growth to gradually taper off, influenced by the impact of tightened macroprudential strategies.

Gareth Leather, an economist at Capital Economics, observed that with growth faltering and inflation below target, the bank might pursue further easing measures in the coming months. ING economist Min Joo Kang suggested that a rate cut in November is unlikely, predicting the next possible reduction to occur in March. Mindful of the risks associated with rate cuts amid rising housing debt, the Bank of Korea is expected to proceed with caution before enacting further easing measures, noted the economist.