The Bank of Korea (BOK) slashed its benchmark interest rate by 25 basis points to 1.5 percent on July 18, 2019 in a bid to tackle slowing growth amid rising concerns about the Korean economic outlook. There was mounting pressure on the central bank to act swiftly to boost the economy following its contraction in the first quarter of this year, which recorded the worst quarterly performance since the global financial crisis in
2008. The economy has been beset with a series of downside risks such as flagging exports, sluggish equipment investment, Japan’s export restrictions on Korea and the ongoing trade dispute between the U.S. and China.
The rate cut was made for the first time since June 2016 when the BOK brought down the key interest rate to a record low of 1.25 percent. The rate was then raised by a quarter percentage point twice in November 2017 and November 2018 to 1.75 percent.
The recent rate reduction reflects a broader monetary easing wave across the Asia Pacific region, with economic forecasts being mostly downgraded. Central banks in India, Australia and New Zealand recently cut their interest rates in response to slowing global economic growth. The BOK said that it is keeping a close watch on the possible escalation of trade feuds between Korea and Japan and between the U.S. and China.
The recent move to lower the benchmark rate, which is now only 25 basis points above the alltime low, is expected to help cushion the economy against sluggish exports and worsening external trade conditions. However, it may add to concerns of growing household debt and fuel a rise in housing prices. Another negative implication may be a
potential outflow of foreign investment from the local stock and bond markets as the policy rate gap between Korea and the U.S. has now widened to one percentage point.