South Korea cuts interest rate to record low, adding to global monetary easing

SEOUL - South Korea's central bank cut its benchmark interest rate by 0.25 basis points on Thursday to an all-time low of 1.75 per cent, reflecting continued concerns over deflation and the pace of economic growth.

It was the first cut since October when the Bank of Korea (BOK) took the rate down to a record-equalling low of 2.0 per cent - a level last seen in 2009-10 when Asia's fourth-largest economy was seeking to recover from the global financial crisis.

Other economies have also cut rates recently to take advantage of lower inflation to ease monetary policy to spur sluggish growth.

Bond futures rose and the won fell after the decision. Most economists polled by Reuters had expected no rate change at this meeting, though many had still predicted a cut in coming months if the country's economic recovery continued to struggle to gain traction.

"We think the two key drivers behind today's decision are a weaker economic outlook and deflation pressures," said Ronald Man, an economist at HSBC in Hong Kong. "Our baseline scenario is for a further 25 basis point rate cut in Q3 2015, which will bring the policy rate down to 1.50 per cent."

The Bank of Thailand also cut its policy interest rate on Wednesday in a surprise move. India has cut rates twice already so far this year and China has eased policy two times, with more moves expected. Singapore, Australia and Indonesia have also eased.

The Bank of Korea has been facing mounting pressure to lower borrowing costs in the past few weeks as indicators have shown little evidence that Asia's fourth-largest economy is on a rapid rebound.

January factory output declined at the fastest pace since December 2008, while exports suffered their worst fall in two years in February.

Members from the central bank's monetary policy committee also expressed concerns over the economic situation abroad, including the euro zone and China, in minutes from February's rate meeting released on Tuesday.

Some members highlighted poor exports at home and growing worries over possible deflation in the minutes.

Policymakers have taken a step back from positive talk earlier this year, with the finance minister recently noting the weakness in the economy's recovery and expressing concerns over persistently low inflation.

South Korea's annual inflation slowed to a 16-year low in February, though much of it was blamed on low commodity prices rather than weak consumption.

Reuters, AFP

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