Seoul: The neutral interest rate in South Korea is projected to range between -0.2 percent and 1.3 percent for the first quarter of the year, as reported by the Bank of Korea (BOK) on Sunday. This estimate reflects a change in the country’s economic landscape, where fluctuations in the neutral interest rate have been observed over the years.

According to Yonhap News Agency, the BOK report highlights a decline in South Korea’s neutral interest rate since 2000, with a slight rebound after the coronavirus pandemic. In 2000, the neutral interest rate was estimated between 1.4 percent and 3.1 percent, but it decreased to a range of -1.1 percent to 0.5 percent by the first quarter of 2020. The neutral interest rate represents the rate at which an economy operates at full employment with stable inflation, where the central bank’s monetary policy is neither expansionary nor contractionary.

The report also indicates uncertainty about the future trajectory of South Korea’s neutral interest rate. The BOK suggests that
various factors, including the aging population and productivity changes, will influence the rate’s direction. Last month, South Korea’s central bank reduced its key interest rate by 0.25 percentage points to 3.25 percent, marking the first rate cut in 38 months, due to weakening domestic demand and moderating inflation.