Bank Of Korea Cuts Key Rate For First Time In More Than 4 Years

The Bank of Korea lowered its base rate for the first time in more than four years on Friday, in order to stimulate economy as inflation weakened to the lowest since early 2021 and household debt began to slow on tight macroprudential policies. The Monetary Policy Board headed by Rhee Chang Yong decided to cut the Base Rate by 25 basis points to 3.25 percent from 3.50 percent.

The board judged that it is appropriate to slightly moderate the restrictive monetary policy and examine the impact of this going forward. However, one member Chang Yongsung voted to maintain the base rate at 3.50 percent. The reduction came after holding the policy rate for thirteen consecutive meetings and marked the first cut since May 2020.

Rhee said that it is fine to see today's decision as a hawkish cut.

In September, consumer price inflation weakened to 1.6 percent, which was the lowest since February 2021, largely due to the sharp fall in petroleum prices and the base effect.

The bank forecast inflation to fall slightly below the previous forecast of 2.5 percent this year due to downward pressures from supply side factors. Meanwhile, core inflation is projected to remain stable at around 2 percent.

In the second quarter, the economy had contracted 0.2 percent on weaker consumption and investment.

Policymakers observed that uncertainties surrounding the 2.4 percent economic growth outlook for this year and 2.1 percent for 2025 have heightened compared to August due to delayed recovery in domestic demand.

The bank also said that housing prices in the Seoul area and household debt growth are anticipated to gradually slow due to the effects of tightened macroprudential policies.

Capital Economics' economist Gareth Leather said with growth struggling and inflation below target, the bank will resort to more easing over the coming months.

ING economist Min Joo Kang said a November rate cut is off the table and the likely time for the next reduction will be March.

As BoK seems to be well aware of the risks of rate cuts in the face of rising housing debt, it will be a while before the BoK takes further easing steps, the economist noted.