Friday, July 13, 2012
Korean central bank reduces interest rate
The Korean central bank, Bank of Korea, cut the benchmark interest rate down to 3 per cent yesterday (July 12). Most experts had predicted no change. There are conflicting factors in the economy a combination of slowing economic growth but also higher inflation expectations.
No doubt the recent lowering of rates in China and Europe had some influence on the decision. Korean Treasury Bond yields fell below 3.25 per cent. This is a record low since the beginning of the financial crisis.
Tim Condon an analyst from Singapore said:"The BOK's move is not an issue because I figure the neutral level of the policy rate is 2.75 percent. Another 25-bps rate cut will come in August or September. Inflation is no longer a problem. Possibly rate cuts by central banks in Europe and China affected the BOK's rate decision," The Korean Finance ministry has revised the forecast for growth in 2012 from 3.7 per cent to 3.3 per cent.
External conditions are the main reason for adjusting the growth predictions. Europe is not yet recovering from its crisis and Chinese growth is slowing somewhat. The new forecast is in line with that of the OECD (Organization for Economic Cooperation and Development) which in May forecast growth of 3.3 per cent in South Korea.
The rate of inflation in South Korea slowed in June to 2.2 per cent, well within the target of between 2 and 4 per cent. This may have also influenced the decision to lower the interest rate. For more see this article.