SEOUL: South Korea’s central bank, the Bank of Korea (BOK), has reduced its benchmark interest rate by 25 basis points to 3.35 percent, marking the first rate cut in over three years, as the country’s inflation shows signs of stabilization and domestic demand continues to struggle.
According to Yonhap News Agency, the decision by the BOK comes amidst a backdrop of moderating inflation and increasing concerns over sluggish domestic demand. This rate cut, the first since August 2021, reflects a broader trend following the US Federal Reserve’s recent rate reduction. The BOK highlighted that while inflation dropped to 1.6 percent in September, household debt growth is decelerating and the risks associated with foreign exchange markets are diminishing.
The move by the central bank is seen as a response to the prolonged downturn in private consumption, facility investment, and construction investment, which have underscored the depth of the economic challenges South Korea faces. Both the Korea Development Institu
te and the Organization for Economic Cooperation and Development have recently lowered their growth forecasts for the country, signaling heightened caution.
Rhee Chang-yong of the BOK explained that the modesty of the 25 basis point cut was due to the need to monitor its impact on financial stability, particularly concerning home prices and household debt. These areas remain significant concerns for policymakers, given their potential to destabilize the broader economy.
In conjunction with the central bank’s measures, the South Korean government has been called to action. It is expected to address risks tied to the real estate market and household debt while implementing strategies to rejuvenate domestic demand. Earlier this month, the government announced policy initiatives expected to generate approximately 30 trillion won ($21 billion) in new investments over the next five years, focusing on regulatory reforms and extended management rights for project operators.
Despite these efforts, some in the busin
ess community feel that the rate cut is insufficient to make a substantial difference in the struggling domestic market. The government, financial authorities, and market stakeholders are urged to collaborate more closely to mitigate concerns about the property market and household debt, which could undermine the benefits of the rate reduction.