SEOUL, South Korea – South Korea’s central bank lowered its key interest rate to a record low Wednesday as it tries to bolster a fragile economic recovery. The bank also downgraded its growth forecasts for Asia’s fourth-largest economy.
The Bank of Korea trimmed the key rate by a quarter of a percentage point to 2 per cent for October. It was the second rate cut this year after the central bank lowered lending costs in August following a deadly ferry disaster, the shock of which dented retail sales and other spending.
It also revised down its growth forecast for South Korea. It said the economy will likely expand 3.5 per cent this year, not 3.8 per cent it forecast three months earlier, citing slower-than-expected improvements in capital expenditure and consumer spending. Next year, South Korea’s economy will grow 3.9 per cent, instead of 4 per cent.
The 2015 growth forecast takes into account the government’s big budget plan for 2015, which is expected to add 0.2 of a percentage point to the growth, the bank’s governor Lee Ju-yeol said.
Lee said growth momentum is “not sufficient” without the government’s expansionary budget.
Analysts expected the rate cut as South Korea’s finance minister had said the recovery in Asia’s fourth-largest economy was fragile. The weak yen and a slow recovery of capital spending were also expected to dent the recovery of the export-driven economy.
The central bank chief said low inflation gave policymakers room to respond to the poor recovery. Policymakers also saw weak sentiment among economic players as a risk to the economy.
“The two interest rate cuts in August and this month are expected to significantly help the recovery of growth momentum,” Lee said.
In February 2009, the bank lowered its policy interest rate to 2 per cent in the wake of the global financial crisis.