Bank of Korea Implements a Second Rate Cut since July

October 11, 2012

The seven-day repo rate was reduced to 2.75%, the lowest level since 1Q11, from 3.0% and a peak prior to July of 3.25%.  A rather downbeat statement posted on the Bank of Korea web site speaks of “lackluster” exports and domestic demand and “judges the downside risks to growth to be large, owing chiefly to the spillover of the euro area fiscal crisis to the real economy and to the possibility of the so-called fiscal cliff materializing in the US.”  The statement observes a persisting negative output gap in the domestic economy and anticipates CPI inflation remaining below the 3% target midpoint for “the time being.”  Officials hint of possible additional interest rate cuts as monetary policy is conducted “so as to stabilize consumer price inflation at the inflation target over a medium-term horizon while continuing its efforts to lower inflation expectations and ensuring that the growth potential is not eroded.”

South Korea’s main interest rate was slashed during the Great Recession to a low of 2.0% by February 2009, and rate normalization did not commence until June 2010.  Additional rate hikes followed in November 2010, January 2011, March 2011, and June 2011.  All five of those tightenings, like the two subsequent easings, were by 25 basis points.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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