South Korea cuts interest rate for second time in three months

[Seoul] South Korea's central bank cut interest rates for the second time in three months on Wednesday, in a further effort to boost an economy struggling with weakening demand at home and abroad.

The Bank of Korea (BOK), which has come under government pressure to help inject some pace into the country's slow economic recovery, cut its benchmark rate by 25 basis points to 2.0 per cent.

It followed a similar cut in August that ended a 15-month interest rate freeze.

The 2.0 per cent rate matches a record low last seen from February 2009 through June 2010, when Asia's fourth-largest economy was seeking to recover from the global financial crisis.

The latest cut came before the BOK was due to announce its economic outlook, which analysts expect will see a downward revision of its growth forecast for 2014.

In a statement announcing the rate cut, the bank cited lingering concerns over the global economic outlook, with the trend towards recovery in the US offset by sluggish growth in the eurozone.

It also noted worrying volatility in the domestic financial markets where stock prices have fallen significantly of late, coupled with a rapid depreciation of the previously strong Korean won.

South Korea unveiled a 41 trillion won (US$40 billion) stimulus package in July, when Finance Minister Choi Kyung-Hwan warned of a risk of recession after the economy grew at its slowest rate for more than a year in the second quarter.

The stimulus includes 11.7 trillion won in expanded fiscal spending and 29 trillion won in extra financing support.

The lion's share will be spent in the remainder of this year, with 3.0 trillion won earmarked for the beginning of 2015.

Gareth Leather, Asia economist at consultancy Capital Economics, said a further cut was unlikely.

"A combination of stronger demand from the US, low interest rates and an increase in government spending, should help to drive a decent recovery over the next year or so," Mr Leather said in an analyst note.

He cited concerns that low interest rates could have a damaging impact on household debt levels in South Korea, which are already among the highest in Asia.

"Lower borrowing costs could encourage households to take on more debt, further heightening risks in the financial sector," Mr Leather said.

- AFP