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South Korea unexpectedly cuts key interest rate

13 july 2012, 10:01
Photo courtesy of realestate.com.au
Photo courtesy of realestate.com.au
South Korea's central bank unexpectedly cut its key interest rate Thursday for the first time in more than three years, joining international moves to ease the impact of the eurozone debt crisis, AFP reports.

Announcing a cut of 25 basis points to 3.00 percent, the Bank of Korea (BOK) warned that the global economic recovery would be more moderate than originally forecast and downside risks to growth were growing.

Its move follows interest rate cuts last week by the European Central Bank and China's central bank. Brazil Wednesday cut its rate to a record low.

"The domestic economy will sustain a negative output gap for a considerable time going forward, due mostly to the increase in euro area risks and the sluggish economies of its major trading partners," the bank said in a statement.

The reduction was the first since February 2009, when the key rate hit a record low of 2.00 percent.

The bank raised the rate in five stages between July 2010 and June 2011 to curb inflation. It had remained frozen at 3.25 percent till Thursday.

Finance Minister Bahk Jae-Wan warned last week that South Korea's growth was likely to slow in the second half of this year.

His ministry has cut its full-year growth forecast for Asia's fourth-largest economy to 3.3 percent from a December projection of 3.7 percent.

The central bank said it "appraises the trend of economic growth to have weakened more than originally anticipated, with the rates of growth in exports and domestic demand remaining at low levels".

It also highlighted a decline in inflation, suggesting further monetary easing may be in store -- a view supported by some economists.

"The BOK has shaken off those inflation fears, which in any case seemed misguided to us," said Capital Economics in a commentary.

Inflation was 2.2 percent in June and falling global oil prices were likely to put further downward pressure on the figure.

They key rate would end the year at 2.75 percent, Capital Economics said.

Moody's Analytics said it expects another quarter-point reduction in August or September.

"Inflation is under control and currently running below the BOK's 2012 targets, while production has eased in the face of softer external conditions," it said.

"Under these conditions, looser monetary policy is required."

-- Dow Jones Newswires contributed to this report --

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