S. Korea cuts interest rate to 1.75% to fend off deflation


SEOUL: South Korea on Thursday became the latest country to cut interest rates as the central bank announced a surprise 25 basis point reduction to a record-low 1.75 percent, as it tries to fend off deflation and kickstart the struggling economy.

The cut is the second by the Bank of Korea (BOK) in five months following a similar move in October and it said in a statement that the economy is suffering from slow demand and lack of confidence among businesses and consumers.

“Exports have fallen . . . domestic demand, including private consumption and investment, has remained sluggish and consumer sentiment showed little improvement,” the statement said. “The domestic economy will show a moderate recovery but growth will hover below our earlier forecast,” it added.

A painful economic slowdown in China—South Korea’s largest trading partner—will also pose a growing risk, the bank noted.

The news sent the won falling against the dollar, with the greenback buying 1,132.01 won, against 1,126.40 won Wednesday.

Thursday’s cut makes the BOK the latest Asian central bank to lower rates. In recent months China and India have both made two reductions, while Australia, Indonesia, Singapore and Thailand have also been forced to ease monetary policy.

And on Monday the European Central Bank launched its $1.2 trillion bond-buying scheme, known as quantitative easing, as it looks to bring an end to years of anaemic growth and kickstart inflation.

Japan has been embarking on a similar program, with interest rates stuck at near zero for years.

The widespread easing measures come as the US Federal Reserve prepares to lift rates.

“The BOK would’ve been worried about falling behind the pace of global easing by holding the benchmark rate unchanged,” Park Sang Hyun, a Seoul-based economist for HI Investment & Securities, told Bloomberg News. “Further rate cuts will depend on economic data to be released from now.”

The BOK in January slashed its economic growth forecast for this year to 3.4 percent from the previously tipped 3.9 percent, while it also lowered its inflation outlook to 1.9 percent from the 2.4 percent earlier stated.



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