Korea's central bank delivered its second interest rate cut this year on Thursday due to increased downside risks to growth, and also revised down its 2012 growth outlook by a larger-than-expected margin to 2.4 percent.
As widely expected, Bank of Korea (BOK) Gov. Kim Choong-soo and his six fellow policymakers lowered the benchmark 7-day repo rate by a quarter percentage point to 2.75 percent for October, following the second straight month of the freeze.
The October decision, which was not unanimous, followed the BOK's surprise rate reduction in July in an effort to prop up the weakening economic growth, buffeted by the protracted eurozone debt crisis.
Reflecting growing downside risks to growth, the BOK's 2012 growth outlook was revised down from its previous estimate of 3 percent made in July. The BOK also lowered its 2013 growth forecast to 3.2 percent from 3.8 percent.
"Economic conditions at home and abroad worsened more sharply than previously estimated. We hope that the rate cut will help the recovery of the local economy," Kim told a press conference, adding that the decision would have a negligible impact on inflation.
The governor said that there were no talks about a 0.5-percentage-point rate cut as the current economic slowdown mainly stemmed from external economic risks that Korea cannot control.
"A deeper rate cut also could give economic players unnecessary concerns for economic growth," Kim said.
The central bank said that the growth of emerging countries has slowed, affected by the global economic downturn and the global economic recovery is likely to be very moderate down the road.
The BOK reiterated that it will manage the monetary policy to ensure that growth potential is not eroded while making efforts to keep price stability.
Analysts said the rate cut came as a spate of economic data point to weakening economic growth and a stronger local currency is feared to hurt already-faltering exports. Inflation growth also stayed below the BOK's median inflation target of 3 percent.
"The downward growth outlook underscored the necessity to prop up the economy," said Yoon Yeo-sam, a fixed-income analyst at KDB Daewoo Securities Co.
He said there is a low chance the fourth-quarter growth will further worsen, but economic uncertainty persists, including risks from the so-called fiscal cliff in the U.S.
"But an additional rate cut is not likely to come within this year, given hectic political events," he said.
Ahead of the December presidential vote, the timing of a rate cut cannot be pushed back beyond this month as political events would make it difficult for the government and the central bank to change economic and monetary policies, according to analysts.
Industrial output posted on-month falls for the third straight month in August and exports, a backbone of the Korean economy, fell on-year for the third straight month in September.
Despite the economic slowdown, the local currency has appreciated more than 3.5 percent to the dollar this year, raising concern a stronger won may crimp the country's exports, which account for about 50 percent of the economy.
The country's consumer prices remained subdued, giving solace to policymakers to lower the policy rate, analysts said. The annual growth of Korea's consumer prices picked up to 2 percent in September from 1.2 percent in August, but it largely remained in the comfort zone of the BOK's inflation target band.
Experts say that an additional rate reduction is not likely to come this year as the BOK may opt to save ammunition to brace for further deterioration of economic conditions.
The country's 2012 consumer inflation is expected to grow 2.3 percent, lower than the BOK's earlier estimate of 2.7 percent. There are also some potential risk factors, such as recent run-ups in oil prices and unstable agricultural product prices, according to the central bank.
"The BOK is expected to stand pat on the rate for the rest of this year and its adjustment of the policy rate for next year will hinge on developments of external factors," said Lee Sang-jae, a senior economist at Hyundai Securities Co.
Meanwhile, the BOK said it decided to keep the consumer inflation target band between 2.5 and 3.5 percent for 2013-2015 after consultation with the government.
For 2010-2012, the BOK aimed to maintain its median target of 3 percent with a margin of plus or minus 1 percentage point.
The BOK said that it has decided to reduce the target range in a bid to reflect the recent trend of stabilizing inflation and to stress the central bank's willingness to focus on price stability.
Kim said the removal of the mid-point inflation target for the new band aims to prevent inflation expectation from being anchored over the long haul. (Yonhap)