South Korea's central bank cut the key interest rate on Thursday following the second straight month of the freeze as the local economy loses steam on weaker exports and sluggish domestic demand.
Bank of Korea Gov. Kim Choong-soo and his six fellow policymakers lowered the benchmark 7-day repo rate by a quarter percentage point to 2.75 percent for October, the second rate cut this year.
The October decision followed the BOK's surprise rate reduction in July in an effort to prop up the weakening economic growth, buffeted by the protracted eurozone debt crisis.
The move was in line with a consensus by 15 out of 18 analysts polled by Yonhap Infomax, the financial news arm of Yonhap News Agency.
"A set of economic indicators underscored the need to shore up the growth," said Kong Dong-rak, a fixed-income analyst at Taurus Investment & Securities Co.
"A stronger local currency and an upcoming presidential election seemed to cement the case that October would be the right timing for a rate cut."
Analysts said the rate cut came as a spate of economic data point to weakening economic growth and a stronger local currency is feared to hurt already-faltering exports. Inflation growth also stayed below the BOK's median inflation target of 3 percent.
Ahead of the December presidential vote, the timing of a rate cut cannot be pushed back beyond this month as political events would make it difficult for the government and the central bank to change economic and monetary policies, according to analysts.
The growth of the Korean economy is highly likely to fall to the 2-percent range this year, lower than the BOK's 3 percent estimate. The BOK plans to unveil its revised 2012 and 2013 growth outlook later in the day.
The BOK said in its recent monetary policy report it will manage the key rate to help the local economy recover to its long-term growth trend while making efforts to keep price stability.
Industrial output posted on-month falls for the third straight month in August and exports, a backbone of the Korean economy, fell on-year for the third straight month in September.
Despite the economic slowdown, the local currency has appreciated more than 3.5 percent to the dollar this year, raising concern a stronger won may crimp the country's exports, which account for about 50 percent of the economy.
The country's consumer prices remained subdued, giving solace to policymakers to lower the policy rate, analysts said. The annual growth of Korea's consumer prices picked up to 2 percent in September from 1.2 percent in August, but it remained in the comfort zone of the BOK's 2-4 percent inflation target band.
Experts say that an additional rate reduction is not likely to come this year as the BOK may opt to save ammunitions to brace for further deterioration of economic conditions.
"The BOK is expected to stand pat on the rate for the rest of this year and its adjustment of the policy rate for next year will hinge on developments of external factors," said Lee Sang-jae, a senior economist at Hyundai Securities Co.
