BOK cuts base rate to 1.75 pct in surprise move

South Korea's central bank unexpectedly slashed the base rate to a record low of 1.75 percent Thursday, putting aside concerns over surging household debt and joining a global easing wave to bolster growth.

The rate cut is the first since October, when the Bank of Korea

(BOK) brought down the key rate to a then-record-matching low of 2 percent. The monetary policy committee had since then unanimously voted to keep the base rate on hold.

"A quarter percentage point rate cut was deemed desirable as growth is expected to fall below forecasts and inflation is also expected to fall. We considered how there is a need to further boost economic recovery momentum even after last year's two rate cuts," BOK Gov. Lee Ju-yeol told reporters in a press conference.

Lee, however, strongly rebutted views that the country is in a deflation phase, attributing low inflation to supply factors, such as sliding oil prices.

The decision was the first split ballot in five months, with two policy board members voting to hold the rate, according to Lee.

The BOK includes the names of dissenters in minutes released roughly three weeks after the policy decision.

A statement by the policy board also showed its perception of the economy soured starting in February when it left the base rate unchanged. The committee noted "sluggish movements" in domestic demand and said the negative output gap will remain "longer than anticipated."

In addition to the rate cut, Lee vowed to expand the aggregate credit ceiling by a minimum 3 trillion won (US$2.6 billion) from the current 15 trillion won threshold.

The rate cut came as a surprise to the market, which had been betting that the BOK would extend its wait-and-see mode for the fifth straight month and likely take action in April when it releases the latest economic updates.

Analysts cited growing concerns over household debt, which continues to soar to fresh record highs, as the biggest factor to prevent the BOK from cutting the base rate in March. Only four of 18 analysts had projected a rate cut this month, according to a poll by Yonhap Infomax, the financial news arm of Yonhap News Agency.

In a Feb. 17 press conference, BOK Gov. Lee Ju-yeol had said that sharp household debt growth was among the reasons behind the policy board's decision to hold the rate, adding the 2 percent level is "not at all at a level that limits the real economy," bolstering the case for another rate freeze.

In the March press conference, however, Lee remained mostly reticent about concerns over household debt, only stressing that household debt is an issue that should be dealt with in cooperation with the government and the financial regulator.

"It seems that authorities felt pressured more by a worsening economy rather than growing household debt. The fact that Yim Jong-yong, the Financial Services Commission chairman designate, puts less focus on household debt compared with his predecessor may have affected the BOK's stance," said Lee Jung-bum, an analyst at Korea Investment & Securities.

While the rate cut startled the market, some analysts had projected the BOK to take action this month, citing worries about export outlook and low inflation.

Consumer prices edged up 0.5 percent on-year in February, growing less than 1 percent for the third month in a row and marking the slowest growth since July 1999. Outbound shipments slumped 3.4 percent on-year last month, boding poorly for the heavily trade-reliant economy.

"We believe there are limited economic benefits from waiting.

It is clear that Korea's growth outlook has worsened," HSBC economist Ronald Man said in a March 9 report. "The sooner the BOK lowers its policy rate, the sooner its benefits will transmit through the economy and support growth."

Some analysts forecast that the surprise move may signal the beginning of further easing aimed at boosting tepid growth.

"It seems that the central bank may be open to additional rate cuts going forward depending on the economic recovery and inflation, joining the global wave of easing," Kwon Han-wook, an analyst at Kyobo Securities, said prior to Lee's conference.

Taking a cue from the European Central Bank's aggressive quantitative easing, nearly 20 countries, including China, India and Australia, have lowered their policy rates this year.

Nomura economist Kwon Young-sun said the BOK may implement another rate cut as early as July.

"Today's move suggests the BOK sees substantial downside risks to its economic outlook. Indeed, we expect Korea's GDP growth to slow to 2.5 percent in 2015 from 3.3 percent in 2014 and inflation to ease to 0.8 percent from 1.3 percent. As a result, we expect one more 25 basis point rate cut to 1.50 percent by July 2015," he said.

The central bank is due to release its updated economic forecast on April 9. In its latest forecast made in January, it revised down its GDP forecast to 3.4 from 3.8 percent while also slashing its inflation outlook to 1.9 percent from 2.4 percent.

But some like Shinhan Investment analyst Park Hyung-min played down chances of an additional rate cut.

"The BOK is forecast to trim its growth outlook in April. But it would be insufficient to support the case of a rate cut unless the change (in growth outlook) is significant," he said, adding that an additional rate cut would require situations, such as a eurozone recession or crisis in emerging economies.

The policy rate has been trending lower since July 2012 when the BOK slashed it to 3 percent from 3.25 percent. The BOK has since lowered the rate by quarter percentage points in October 2012, May 2013, in August and October 2014, and this month. (Yonhap)