South Korea's central bank cuts rates in a bid to boost the economy

SEOUL, South Korea (AP) — South Korea’s central bank on Friday cut its policy rate for the first time in more than four years as pressure to revive a sluggish economy outweighed concerns about the country’s level of household debt.

The Bank of Korea lowered its key interest rate by a quarter percentage point to 3.25% following a meeting of its monetary policy committee, in its first move to lower borrowing costs since May 2020, when the economy was weathering the COVID-19 pandemic.

The bank raised the rate by a quarter percentage point in August 2021 over concerns about inflation and soaring household debt, driven in part by skyrocketing house prices, and then froze rates for over three years.

The bank said in a statement that domestic demand is making a slow recovery, bogging down the pace of economic growth. It said there was room for a rate cut because inflation is showing signs of stabilizing and household debt is also increasing more slowly as the housing market in the greater Seoul area cools down.

At a news conference, central bank Governor Rhee Chang-yong said there’s still capacity in the economy for additional cuts, pointing out that house prices in the capital area grew by two thirds less in September than in August. The country’s consumer price inflation also eased to 1.6% in September, below the policy target of 2%.

However, Rhee said it’s still too soon to conclude that the country’s financial situation is stabilizing and indicated that the bank would be conservative about further rate cuts.

“We will decide after monitoring the stability in financial markets,” said Lee. He said the bank’s latest step could be interpreted as a “hawkish cut,” meaning that it still favors tighter monetary conditions.

Alarmed by slowing growth, government officials have called for the bank to lower borrowing costs. During a parliamentary hearing, South Korean finance minister Choi Sang-mok told lawmakers that he “respects and welcomes” the rate cut.

South Korea’s trade-dependent economy is facing increasing uncertainties, including the growing crisis in the Middle East that could potentially influence fuel prices, exchange rates and public utility prices, the bank said.

“The future path of economic growth is likely to be influenced by the pace of recovery in domestic demand, economic conditions in major countries and trends in information-technology exports,” the bank said.

“The growth in house prices in the metropolitan area and household debt is expected to gradually slow down due to the strengthening of macroprudential policies,” aimed at maintaining the stability of the financial system, the bank said.

“However, there’s still a need to monitor related risks, such as the impact the lowered base interest rate may have on household debt.”

The bank projects South Korea’s economy to grow at 2.4% this year, down from 2.6% in 2023.

Household loans issued by banks were measured at around 1,135.7 trillion won ($841 billion) at the end of September after growing by about 5.7% during the month, compared to a 9.2% increase in August. While the country’s exports have been gradually improving, job growth remains sluggish, due to weakness in construction industries and other sectors, the bank said.

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The headline of this story has been edited to reflect that the central bank cut, not raised, its policy interest rate.