Bank of Korea

May 9, 2013

The first interest rate cut in seven months has been implemented in South Korea in response to continuing “weak” Korean economic growth and “low” prospects for inflation.  On growth, officials remarked “the domestic economy will show a negative output gap for a considerable time, due mostly to the slow recovery of the global economy, to the influence of Japanese yen weakening, and to the geopolitical risk in Korea.”  Today’s statement also observed that “inflation will remain low for the time being, provided there are no occurrences of exceptional factors on the supply side.”

During the year to mid-2011, five 25-basis point rate hikes were implemented, lifting the seven-day repo rate to 3.25%.  Today’s 25-basis point cut to 2.5%, which was decided by a 6-1 vote, follows similar actions in July and October of last year.  Many analysts were surprised when a cut failed to happen after the prior policy meeting in March and had assumed that if it didn’t happen then, it wouldn’t be done now, either.  This is the first policy response to the rapid depreciation of the Japanese yen since November.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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