The Bank of Korea (BoK) has taken a decisive step by cutting its benchmark interest rate by 25 basis points to 3.25%. This strategic move was influenced by stabilizing inflation levels and a notable slowdown in household debt growth, as revealed by data published by the central bank on Friday. In a further response to economic conditions, the BoK has also lowered the interest rate on its Bank Intermediated Lending Support Facility, decreasing it from 2% to 1.75%.
As of September, inflation has decreased to 1.6%, yet there remain uncertainties regarding the recovery of domestic demand as well as global economic conditions. This rate cut aims to alleviate some of the pressures of a restrictive monetary policy while assessing the ongoing economic impacts felt across various sectors.
The BoK's board has emphasized the importance of stabilizing consumer price inflation, which saw a drop to 1.6% in September, paralleling a core inflation rate resting at 2%. Despite facing global geopolitical challenges and fluctuations in exchange rates, the bank projects that inflation will likely remain below 2% for the foreseeable future, resulting in a cautious approach to monetary policy.
According to insights from ING Research, a further cut in November seems improbable, with March appearing as a more viable option for the next adjustment. The research noted that inflation is expected to remain subdued, primarily due to a high base effect from the previous year along with diminished demand pressures.
However, ING Research has also indicated potential risks associated with further rate cuts, particularly amidst rising housing debt. They suggest that a stabilization in the housing market could provide a conducive environment for initiating an earlier rate cut. This decision from the BoK comes in the context of a recent uptick in exports, contrasted against a domestic demand recovery that has not met earlier expectations..