(AA) – South Korea’s central bank slashed its key interest rate to a record low 1.75 percent Thursday, a surprise move considering the prevailing expectation that the Bank of Korea would stand firm.
Only last month, bank Governor Lee Ju-yeol cited the country’s heavy household debt as a reason not to lower its base rate, so a sixth straight month at 2 percent appeared likely – commercial bank data in February showed that household debt rose 3.7 trillion won on-month to hit 566 trillion ($499.8 billion).
But amid a worldwide monetary easing trend, Lee conceded to reporters that “growth is expected to fall below forecasts and inflation is also expected to fall.”
“We considered how there is a need to further boost economic recovery momentum even after last year’s two rate cuts,” the governor added.
Sluggish growth and deflationary pressures have regularly been highlighted by local analysts and policymakers as significant areas of economic concern.
When the bank updates its 2015 growth forecast next month, it may well rein in expectations having already dropped its initial GDP estimate for the year to 3.4 from 3.8 percent.
Inflation has never since the turn of the century been so tame, to the extent that South Korean consumer prices rose by just 0.5 percent on-year last month.
February was also poor for exports, as outbound shipments dropped 3.4 percent on-year.
President Park Geun-hye recently embarked on a four-nation tour of the Middle East as part of efforts to boost cooperation for South Korea’s export-reliant economy – she has also overseen a succession of free trade deals during her time in office, including with Turkey.
Park’s Finance Minister Choi Kyung-hwan quickly praised Thursday’s rate cut as a move that “can energise the weak economic growth momentum and alleviate low inflation worries.”