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South Korea cuts interest rate to 2.25%

South Korea's central bank cut interest rates for the first time in 15 months on Thursday (Aug 14), under growing government pressure including warnings of recession from the new finance minister.

SEOUL: South Korea's central bank cut interest rates for the first time in 15 months on Thursday (Aug 14), under growing government pressure including warnings of recession from the new finance minister. The Bank of Korea (BOK) cut its benchmark overnight inter-bank loan rate by 25 basis points to 2.25 per cent. It was the first rate cut since May 2013.

The largely-expected move came after the finance ministry last month unveiled a US$40 billion (S$50 billion) stimulus package and revised its 2014 economic growth forecast down from 4.1 per cent to 3.7. At the time, Finance Minister Choi Kyung-hwan warned that the national economy stood at a crossroads between "making a leap forward and falling into a recession".

The central bank has autonomy over monetary policy, but is known to have succumbed to government pressure in the past. According to the BOK, the economy posted its slowest growth in more than a year in the second quarter, partly due to sluggish consumer spending following the Sewol ferry tragedy.

Gross domestic product rose a seasonally adjusted 0.6 per cent in the April-June period from the previous quarter. It was the slowest growth since the first quarter of 2013 and missed market expectations of around 0.7 per cent. Year-on-year, Asia's fourth largest economy expanded 3.6 percent, down from the previous quarter's 3.9 per cent.

"Exports have remained robust, but domestic consumption earlier hit by the Sewol disaster has not improved enough, while spending and investment sentiment also remain sluggish," the central bank said in a statement. "The monetary policy will be operated in ways to support the momentum for growth and ensure that inflation remains within our target range," it said.

Despite the latest rate cut, inflationary pressure will remain "not so significant for a while," it added. Inflation has remained below two percent for nearly two years since November 2012 - far below the central bank's target rate of 2.5 to 3.5 per cent.

The BOK has forecast an inflation rate of 2.1 per cent for this year, following a 1.3 per cent increase in 2013, which was the slowest in 14 years. 

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