BOK cuts interest rate to 2.75% to spur growth

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BOK cuts interest rate to 2.75% to spur growth

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Bank of Korea Gov. Kim Choong-soo heads a monetary policy committee meeting yesterday at the bank’s headquarters in central Seoul. The BOK lowered the key interest rate as well as its economic outlook. [YONHAP]

To keep away the demons of economic crisis abroad and recession, the central bank was forced to lower the key interest rate from 3 percent to 2.75 percent.

It also lowered its forecast for economic growth this year.

It was the first time in more than a year that the central bank lowered its key rate to under 3 percent.

“Lowering the key rate will help economic activities,” Bank of Korea Gov. Kim Choong-soo said yesterday.

The governor stressed that the monetary policy committee did not discuss shaving the key rate by 0.5 percentage point.

“We believe a 0.25 percentage point cut is enough to defend our economy,” the governor said. “An unnecessarily sharp lowering of the rate would only create concern and could spark wider negative sentiments about the economy.”

The governor said the decision yesterday was not unanimous and that the rate cut was a preemptive move to keep the economy from spiraling downward.

The central bank also lowered its outlook for this year’s growth from 3 percent to 2.4 percent. The adjustment was made only three months after the BOK lowered its 3.5 percent projection, which was first made in April, to 3 percent in July.

“We have lowered the growth outlook as economic indicators, both at home and abroad, have gotten worse than in July,” the governor said.

The governor was confident that economic conditions would improve in the second half of the year. But his view evolved with uncertainties from debt-ridden Europe, the fiscal problems of the U.S. and slower expansion in China. The International Monetary Fund earlier this week lowered its outlook for Korean growth in 2012 from 3 percent to 2.7 percent, citing the worst uncertainties since 2009. The IMF lowered its projection for global economic expansion from 3.5 to 3.3 percent.

The BOK also lowered next year’s outlook from a previous 3.8 percent to 3.2 percent.

The central bank currently projects this year’s inflation at 2.3 percent.

The last time the interest rate was below 2 percent was in March 2011. Since then, the central bank gradually raised the rate to 3.25 percent by June 2011, and it has remained at that level until last July, when the central bank unexpectedly shaved off 0.25 percentage point.

The question is whether the lowered rate will help boost the economy as it did in 2009. The move helped the economy recover quickly.

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While analysts agree that the move by the BOK will likely ease recessionary pressure, its effect will likely be limited.

“The third quantitative easing by the U.S. Federal Reserve has already been reflected in the market, and uncertainties in the euro zone centering on Spain continue to linger,” said Park Hyun-seok, an analyst at Dongbu Securities.

The market’s response was relatively lukewarm as it expected the changes in both the interest rate and the economic forecast. The Kospi only lost 15 points from the previous day, closing at 1,933.

“No surprise,” said Ronald Man, an analyst at HSBC Global Research. “The Bank of Korea delivered its second rate cut this year given limited signs of a meaningful recovery on both external and domestic fronts.” The analyst projected that the central bank will hold at 2.75 percent for the remainder of the year.

“Chances of a further rate cut before year-end are limited, given the sensitivities of changes in monetary policy around the presidential election in December,” Man said.

“If economic conditions prove significantly worse than expected, the central bank has room for further action.”

By Lee Ho-jeong [ojlee82@joongang.co.kr]

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