In a significant shift to address South Korea’s lagging economy, the Bank of Korea has reduced its benchmark interest rate for the first time in more than four years.
The central bank’s decision reflects growing concerns about sluggish economic growth, despite ongoing issues related to household debt.
The Bank of Korea lowered its policy rate by 0.25 percentage points to 3.25% on Friday, following a meeting of its monetary policy committee.
This is the bank’s first rate cut since May 2020, a period when the economy was navigating the Covid-19 pandemic.
Prior to this, the last change occurred in August 2021, when the bank raised the rate by 0.25 percentage points to address concerns over inflation and rising household debt, partly driven by surging housing prices.
The rates have remained unchanged for over three years.
The bank’s statement noted, “Domestic demand is making a slow recovery, bogging down the pace of economic growth.”
It further explained that there was room for a rate cut because inflation had started to stabilize and household debt was increasing more slowly as the housing market, especially in the Seoul metropolitan area, showed signs of cooling.
Domestic demand and global risks weigh on outlook
South Korea’s economy faces growing uncertainties, particularly from global factors.
The ongoing crisis in the Middle East is cited as a potential risk, with implications for fuel prices, exchange rates, and public utility costs.
The Bank of Korea stated:
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.
Monitoring risks despite macroeconomic measures
While the bank sees a gradual slowdown in house prices and household debt due to strengthened macroprudential policies aimed at maintaining financial stability, it cautioned that risks remain.
“However, there’s still a need to monitor related risks, such as the impact the lowered base interest rate may have on household debt,” it said.
The Bank of Korea now projects the economy to grow by 2.4% in 2024, a slight decrease from the 2.6% growth recorded in 2023.
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