Bank of Korea trims interest rates after holding for almost two years

South Korea’s central bank has cut its benchmark interest rate by 25 basis points to 3.25%, the first rate cut from the BOK since the Federal Reserve started tightening its monetary policy in March 2022.

This was in line with a poll of economists from Reuters, who forecasted a rate cut.

The move comes after South Korea’s inflation rate touched its lowest level in over three years, coming in at 1.6% in September, well under BOK’s target of 2%.

Back in August 2021, the BOK started raising rates, adding 300 basis points in just 16 months to reach a 15 year high of 3.5% in January 2023.

At that time, South Korea’s inflation stood at 2.6%, but climbed sharply to hit 6.3% in July 2022, its highest in over 20 years.

In an Oct. 4 report before the decision, Morgan Stanley’s chief Korea economist Kathleen Oh called the action “long-awaited,” pointing out that it has been 22 months since the last rate move in January 2023.

Oh noted that macro conditions are supportive of a rate cut, with a “favourable” inflationary backdrop. “We’ve continued to see muted inflationary pressure since July this year, and upside risks to inflation appear to have faded amid stronger USDKRW and global oil prices,” according to the report.

Furthermore, housing demand, which Morgan Stanley said was the main factor preventing a cut at the BOK’s monetary policy meeting, has faded, which has allowed BOK members to be more dovish.

Oh predicts that after the October cut of 25 basis points, three more consecutive cuts will follow on a quarterly basis, eventually bringing the BOK’s benchmark interest rate to 2.5%.

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