BOK unexpectedly cuts key rate to 3 percent

South Korea's central bank unexpectedly cut the key interest rate on Thursday, underscoring its urgency to cushion the bitter impact of the eurozone debt crisis on the local economy.

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 3 percent for July. It marked the first rate cut since February 2009.

The decision is not in line with a median forecast surveyed by Yonhap Infomax, the financial news arm of Yonhap News Agency. Only one out of 15 analysts predicted a rate cut for this month.

The BOK slashed the key rate by 3.25 percentage points to a record low of 2 percent between October 2008 and February 2009 to fight the global financial turmoil. The bank raised it by five steps between July 2010 and June 2011 to curb inflationary pressure.

Analysts said that the BOK's rate cut came as part of its efforts to join global policy coordination following several central banks' moves to cut interest rates.

Downside risks to economic growth are increasing as the eurozone debt crisis is blurring the global economic outlooks.

The European Central Bank and China's central bank cut the interest rates last week in a desperate effort to bolster the softening economy, dogged by the eurozone fiscal crisis.

The Bank of England vowed to increase its asset-purchase program and market players are awaiting whether the Federal Reserve will take additional unconventional easing steps.

The eurozone debt woes have eaten into South Korea's exports, raising expectations that Korea's second-quarter growth is estimated to have cooled down from 0.9 percent on-quarter growth in the first quarter.

Reflecting the fallout from the eurozone risks, the government revised down its 2012 growth forecast to 3.3 percent from its earlier estimate of 3.7 percent. It also announced plans to increase spending by 8.5 trillion won (US$7.5 billion). The BOK, whose 2012 growth forecast stands at 3.5 percent, plans to unveil revised numbers on Friday.

As for inflationary pressure, South Korea saw the growth of its headline inflation slow to the 2-percent range for the fourth straight month in June. The country's annual inflation growth hit a 32-month low of 2.2 percent in June, below the BOK's median inflation target of 3 percent.

But analysts said that the BOK's rate cut is the response to the weakening economic growth, but the bank also cannot escape criticism that it should have normalized the policy stance faster to secure enough room to cut rates in the face of the global economic headwinds.

"The previous level of 3.25 percent was not even a neutral level of the key rate," Lee Sung-kwon, a senior economist at Shinhan Investment Corp., said before the decision.

"The BOK cannot evade criticism that it has been behind the curve in raising the rate so far even if this month's rate cut aimed to bolster the economy."

Analysts said that once the central bank shifted its policy stance into a soft bias in July, an additional rate reduction may not come this year.

(Yonhap News)