Bank of Korea Cuts Rate, Joining Global Wave of Policy Easing — 2nd Update
By Kwanwoo Jun
South Korea's central bank cut its key interest rate for the first time in more than four years, joining a growing group of global peers in easing monetary policy as it looks to support the economy.
The Bank of Korea lowered its benchmark seven-day repurchase rate by a quarter-percentage point to 3.25% from a 15-year high of 3.50% on Friday, ending its longest-ever run of keeping rates on hold. The central bank's previous rate cut was in May 2020, and it had stood pat at the 13 consecutive rate-setting meetings held since February 2023.
BOK Governor Rhee Chang-yong said the rate-cut decision wasn't unanimous, with one dissenting board member calling for no rate change, and he signaled that further rate cuts would come but not in the near term.
Five of six board members, excluding himself, at the seven-member BOK policy board wanted to hold the rate steady at 3.25% over the next three months while only one member left the door open to more cuts for the same period, he said.
Twenty of the 28 analysts polled by The Wall Street Journal ahead of Friday's decision had forecast a rate cut, while the rest had thought that the policy pivot could be delayed until November.
Cooling inflation, weakening economic growth and the government's efforts to curb mortgage-fueled household debt back the case for a BOK cut. The fact that central banks in the U.S., Europe, New Zealand and some other Asian countries had already kicked off their easing cycles also put pressure on the BOK to loosen policy settings.
Analysts expect that the BOK might opt for a gradual pace of policy easing, bringing the rate down to between 2.50% and 2.75% by the end of 2025.
Subdued inflation in South Korea warrants a policy shift, analysts say, with headline inflation having slowed to a 43-month low of 1.6% in September--below the central bank's annual 2.0% target.
The Federal Reserve's larger-than-usual half-percentage point cut in September could also give the BOK more room for rate cuts further down the road without the risk of badly weakening the won against the U.S. dollar and spurring foreign capital outflows.
The planned inclusion of South Korean government bonds to the FTSE World Government Bond Index in November 2025, announced earlier this week, may also smooth the path for BOK easing as the move could bring in billions of dollars in foreign capital, Citigroup said in a research note.
Analysts expect the pace of cuts in South Korea to be gradual in the coming months because policymakers fear that sharply lower borrowing costs could prompt a surge in mortgage loans and home prices, which could undermine financial stability.
South Korea's export-led economy remains largely in good shape thanks to still-brisk demand for memory chips, cars, ships and other goods overseas.
Exports, however, have shown some signs of losing steam recently, with growth in overseas shipments slowing to 7.5% in September from 12% a month earlier. Analysts say export growth could moderate in the next few months, partly due to potentially weaker prices for semiconductors--a key export for the Asian country.
The central bank in August trimmed its 2024 estimates for gross domestic product and inflation. It expects GDP to grow 2.4% this year, with headline inflation projected to average 2.5%. It expects both GDP and inflation to slow to 2.1% for 2025.
Write to Kwanwoo Jun at kwanwoo.jun@wsj.com