BOK cuts rate to 2.50%

The Bank of Korea governor Kim Choong-soo (Yonhap News)

The Bank of Korea made a surprising cut of its key interest rate to 2.50 percent from 2.75 percent, a move seen aimed at boosting the economy and exports hit by low growth and the weak yen.

But critics said the central bank made the rate cut, the first in seven months, in the face of growing pressure from political circles and the administration.

They said the decision could undermine the central bank’s credibility as an independent entity, which BOK Gov. Kim Choong-soo had emphasized was especially important when resisting external government pressure over rate cuts.

Its decision comes amid a worldwide trend of record-low rate cuts to counter the sluggish economy globally, while Korea’s inflation rate at 1.2 percent in April remains well below the Korean central bank’s target range of 2.5 to 3.5 percent.

The prolonged economic uncertainty in the eurozone and growth in emerging economies falling below expectations overtook a moderate economic recovery projected in the U.S. as its main reason for a rate cut.

However, BOK Gov. Kim said it was only appropriate that the central bank use its tools and “cooperate” with the government and the National Assembly lawmakers to improve the economic sentiment.

“A policy mix (with the government) is always valid,” he stressed, adding that the Finance Ministry’s supplementary budget plan was a major reason the BOK changed its stance on its monetary policy to boost the effects of the country’s fiscal stimulus.

“There is a high level of uncertainty around the world,” he reiterated.

He noted that six members of the monetary policy committee voted for a cut, while only one member voted against it, without disclosing their names.

The governor had previously stood against the rate cut as he constantly argued against the government and lawmakers that the central bank already played its part for the economy last year when it lowered its key rate twice.

Kim also had mentioned the importance of implementing a sound credit policy over monetary policy as a rate cut would burden Korea’s already high household debt.

However, he said the BOK did not expect this month’s lowered rate to fuel rising household debt or inflation beyond the target range.

Another factor that led to the central bank to change its unwavering rate freeze position over the last six months was a series of recent interest rate cuts by Europe, Australia and India.

Kim added the BOK’s 2.5 percent decision had nothing to do with the weakening yen driven by Japan’s aggressive monetary easing, but said the yen’s rapid depreciation is causing concern as it is undermining the stability of the foreign exchange market.

By Park Hyong-ki

(hkp@heraldcorp.com)