Bank of Korea Gov. Rhee Chang-yong (center) leads the Monetary Policy Committee meeting in Seoul on Friday. (Bank of Korea)
South Korea's central bank on Friday cut its key benchmark interest rate, marking its first pivot in its yearslong monetary tightening mode, as inflation continued to moderate and the property market showed signs of cooling.
As widely expected, the Bank of Korea slashed its key rate by 25 basis points to 3.25 percent, the first reduction since August 2021, when Asia's fourth-largest economy began to emerge from the coronavirus pandemic-caused slump.
Many experts had noted that the central bank would not be able to delay a rate cut any longer, especially after inflation dropped to 1.6 percent in September, below its target rate of 2 percent, while concerns over domestic demand remain.
"While inflation is showing a clear trend of stabilization, household debt growth has begun to slow with tightened macroprudential policies by the government, and risks in the foreign exchange market have somewhat eased," the central bank said in a statement.
The BOK said exports have continued to increase while the recovery in domestic demand has been slow. "Uncertainties surrounding the growth outlook have heightened compared to August due to the delayed recovery in domestic demand," it said.
The central bank said it will thoroughly assess the trade-offs among policy variables, such as inflation, growth, and financial stability, and "carefully determine the pace of further cuts of the base rate."
The Federal Reserve also implemented a significant half percentage point rate cut last month, leaving leeway for the BOK to take its own step.
The BOK had continued to stand pat at 3.5 percent following rate freezes since February last year after delivering seven consecutive rate hikes from April 2022 to January 2023.
So far, the central bank has delayed easing policy out of concerns that a hasty rate cut may spur an increase in household debt and threaten financial stability, while inflation has been on a downward cycle.
BOK Gov. Rhee Chang-yong had said rising household debts and home prices should be dealt with immediately to ensure financial stability.
Earlier, the central bank also said conditions are ripening for a policy pivot, although it remains vigilant against soaring household loans.
On the back of a series of measures to curb household debts, home prices have recently shown signs of a slowdown.
The economy has been improving on the back of solid exports, but domestic demand has been faltering.
For the year, the economy is expected to grow 2.4 percent, slowing from the previous year's 2.6 percent gain and the 4.1 percent advance in 2021.
The bank cut its inflation outlook to 2.5 percent for the year, from its earlier estimate of 2.6 percent.
The country's exports are projected to increase 6.9 percent this year, higher than its earlier estimate of 5.1 percent, and private spending is likely to gain 1.4 percent this year, slowing from its earlier projection of a 1.8 percent advance. (Yonhap)
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