South Korea’s central bank cuts policy rate to 3%

Nathan Andrada – Fourth Estate Cooperative Contributor

Seoul, South Korea (4E) – The South Korean central bank surprised the markets on Thursday by lowering its key benchmark interest rate by 25 basis points citing worsening economic conditions in the U.S. and Europe, along with softening demand for local goods in emerging markets.

Economists see this unexpected move by the Bank of Korea to cut its policy interest rate to 3.00 per cent as giving support to the South Korean economy amid increasing global economic uncertainty.

The last time the central bank made a decision to cut rates was more than three years ago. The news out of Seoul caught most markets in Asia by surprise where most major stock indexes have fallen after the announcement as fears of a gloomy economic outlook caused investors to sell.

South Korea’s Kopsi index was lower by 2.2 per cent while Japan’s main shares index Nikkei fell by 1.5 percent at the back of disappointing news that the Bank of Japan did not make any substantial changes to theit monetary policy. Hong Kong’s Hang Seng index lost more than 2 per cent while the All Ordinaries index in Sydney was down by 0.7 per cent.

Earlier this month, Seoul lowered its exports growth forecast for 2012 to 3.5 per cent after initially making a 6.7 per cent projection in January. Among the reasons cited by the government is the prolonged sovereign debt crisis in Europe which adds to the drag on already declining demand in developing countries for South Korean products. Almost half of the country’s growth comes from exports, which grew by 19 per cent in 2011.

Besides the slowing growth in exports, the South Korean economy is also facing some concerns regarding weakening domestic consumption especially in recent months. Analysts say that by cutting the interest rate, the central bank is helping consumers reduce the cost in debt service. South Korea’s household debt is among the highest in Asia at 74 per cent of GDP. 

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