The Bank of Korea lowered its key interest rate for the first time since 2016, citing ongoing weakness in exports amid trade disputes.
The Monetary Policy Board decided to cut the base rate unexpectedly by 25 basis points to 1.50 percent, the bank said in a statement on Thursday.
The reduction has reversed the tightening stance the bank adopted last November, when the rate was raised by a quarter-point.
As the adjustment in construction investment will continue and exports will recover later than originally expected, the economy is forecast to grow at a slower pace of 2 percent level this year, the bank said.
This was below the April forecast of 2.5 percent. Nonetheless, consumption is expected to underpin economic growth.
Looking ahead, looser fiscal policy and a turnaround in the technology sector should help to support growth over the coming year, but with weak global growth set to drag on exports, Korea’s economy is likely to remain sluggish, Alex Holmes, an economist at Capital Economics, said.
If growth and inflation remain weak, further rate cuts are likely, the economist noted.
Inflation remains well below the central bank target. The board observed that inflation will fall short of the path projected in April and fluctuate for some time below 1 percent and then run at the low- to mid-1 percent level from next year.
The board said it will maintain the accommodative monetary policy stance.
“In this process it will carefully monitor developments such as the US-China trade dispute, Japan’s export restrictions, any changes in the economies and monetary policies of major countries, the trend of increase in household debt, and geopolitical risks, while examining their effects on domestic growth and inflation,” the board said.
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