Korea’s central bank cut its key interest rate for the first time in more than three years in what it said is a pre-emptive response to growing economic uncertainties in the wake of the persistent eurozone debt crisis.

The Bank of Korea’s monetary policy committee said it decided to cut the key interest rate from 3.25 percent to 3 percent on Thursday. It is the first time that the BOK has lowered the key interest rate since February 2009.

The change is an end to the BOK’s freeze of the key policy rate at 3.25 percent for 12 consecutive months. The BOK had maintained the rate after raising it by 0.25 percent in June last year. 
“The rate was cut in the hope to affect companies and the real economy rather than real estate. We see that it will give a plus to the real economy and alleviate burden on household debts,” said BOK Governor Kim Choong-soo at a press conference.

Pointing out that household debt may increase by 0.5 percent due to the key interest cut, Kim added that the measure could also bring a decrease of the debt considering that 95 percent of the household debt are loans on variable-rate.

Whether the BOK would change the key interest rate had drawn attention as many of world’s central banks including European Central Bank and People’s Bank of China recently cut rates.

Experts see that BOK’s decision reflects the worsening economic outlook for the latter half of the year.

The BOK reported through a press release that it expected the pace of the global economic recovery to be more moderate than originally forecast and the downside risks to growth to further intensify because of the high degree of uncertainty surrounding the euro area fiscal crisis and possibilities of international financial market unrest.

Regarding the Korean market, it said that the economic growth was weaker than expected and growth rates in terms of export and domestic demand remained at low levels as well, although the uptrend in the number of people employed is being sustained, led by the higher age groups and the service industry.

“The committee anticipates that the domestic economy will sustain a negative output gap for a considerable time going forward, due mostly to the increase in euro area risks and the sluggish economies of its major trading partners,” the BOK said.

The bank also forecasted that inflation would remain below the midpoint of the inflation target for the time being, despite pressures to hike public utility fees for instance.

“In the housing market, sales prices remained weak and leasehold deposits maintained their levels of the previous month in Seoul and its surrounding areas. The uptrends of both sales and leasehold deposit prices in the rest of the country slowed,” said the BOK.

Consumer price inflation fell to 2.2 percent in June, and core inflation also dropped slightly.

Local banks are getting ready to drop interest rates as well, following the BOK’s decision, starting with Industrial Bank of Korea on Friday.

By Park Min-young (claire@heraldcorp.com)