S. Korean central bank cuts policy rate

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IANS | 13 Jul, 2012
Bank of Korea (BOK), South Korea's central bank, unexpectedly cut its benchmark interest rate to 3 percent Thursday, lowering the 7-day repo rate for the first time in 13 months.

The BOK's decision was not expected as most experts predicted the rate freeze due to conflicting factors such as deteriorating global economic outlook and high inflation expectations, reported Xinhua.

The unexpected rate cut came after central banks in Europe and China lowered their policy rates. The three-year Korean Treasury Bond yields fell below the benchmark rate of 3.25 percent for the first time since the global financial crisis, reflecting growing speculation for the BOK's monetary easing.

The European Central Bank was widely expected to lower its policy rate last week due to bleak economic outlook caused by the region's debt crisis, but the unexpected rate cut by the People's Bank of China was perceived as a signal of how fragile the world's No.2 economy became.

"The BOK's move is not an issue because I figure the neutral level of the policy rate is 2.75 percent. Another 25-bps rate cut will come in August or September. Inflation is no longer a problem. Possibly rate cuts by central banks in Europe and China affected the BOK's rate decision," Tim Condon, head of Asia research in Singapore, said by phone right after the rate decision.

Two weeks ago, South Korea's finance ministry revised down its 2012 economic growth outlook for the country to 3.3 percent from an earlier estimate of 3.7 percent due to the expected worsening of external conditions.

The eurozone crisis was originally forecast to ease from the second quarter before getting back on its recovery track in the second half, but the recovery process was unexpectedly delayed, the ministry said.

The downgraded outlook was the same as the one estimated by the Organization for Economic Cooperation and Development, which cut its 2012 growth outlook for the Asia's No.4 economy to 3.3 percent from a prior estimate of 3.5 percent in May.

In addition to the grimmer economic outlook, lower consumer price inflation buttressed for the rate cut by the BOK. The country's consumer price growth slowed in June to a 32-month low of 2.2 percent, staying below the BOK's inflation target band of 2-4 percent for four straight months.