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Bank of Korea unexpectedly cuts interest rate to record low, says growth weaker than expected

SEOUL, South Korea – South Korea unexpectedly lowered its benchmark interest rate Thursday to a record low of 1.75 per cent, joining central banks from Europe to India in efforts to revitalize sluggish economic growth.

The quarter percentage point cut was the first interest rate cut by the Bank of Korea in five months. Analysts had predicted that the central bank would stand pat amid concerns that lower borrowing costs could accelerate growth in household debt.

But the central bank said South Korea’s economic growth and inflation this year will be lower than expected. There are also concerns in financial markets and at the finance ministry that South Korea could suffer falling prices, also known as deflation, which can cause prolonged economic stagnation as people and companies delay investment and spending.

“We took into consideration that it was necessary to revive recovery momentum,” BOK Governor Lee Ju-yeol told a press conference. He repeated his previous view that South Korea’s economy has not entered deflation.

In January, the central bank revised its 2015 growth outlook to 3.4 per cent from 3.9 per cent and downgraded its inflation projection to 1.9 per cent from 2.4 per cent. The bank will release revised economic forecasts in April.

Japan has grappled with a deflationary slump for years and is carrying out an unprecedented stimulus effort to create inflation. Europe is on the verge of deflation and has launched its own massive program to boost the money supply. Central banks in countries such as Australia and India have cut interest rates recently to boost sluggish growth.

The U.S. Federal Reserve, meanwhile, is heading in the opposite direction. It is expected to raise interest rates this year as the U.S. economic recovery gains momentum.

Exports, South Korea’s key growth driver, dropped 3 per cent last month from a year earlier. Industrial production slipped 4 per cent in January from a month earlier while capital expenditure fell 7 per cent in the same month.

The rate cut comes after South Korea’s consumer prices rose less than 1 per cent for the last three months despite government’s efforts to boost consumption and investment. Consumer prices edged up just 0.5 per cent in February, marking the lowest inflation rate in years.

Earlier this week, South Korea’s finance ministry expressed concerns about Asia’s fourth-largest economy falling into deflation, citing weak production, consumption, investment and exports. The finance minister pledged to introduce measures to encourage spending. Some analysts saw the remark as the government giving a green light to the central bank to cut rates.

The central bank lowered the benchmark interest rate two times last year.