South Korea's Central Bank Lowers Interest Rates Amid Economic Concerns

October 14, 2024

On Friday, South Korea’s central bank made a significant move by cutting its policy rate for the first time in over four years, aiming to stimulate a sluggish economy while navigating concerns about rising household debt. The Bank of Korea (BOK) lowered its key interest rate by a quarter percentage point to 3.25% following a meeting of its monetary policy committee. This decision marks the bank’s first reduction in borrowing costs since May 2020, a period when the economy was grappling with the impacts of the COVID-19 pandemic.

The BOK’s previous rate hike occurred in August 2021, responding to concerns about inflation and escalating household debt, largely driven by surging house prices in the country. Since then, rates had remained frozen for over three years. In its latest statement, the bank acknowledged a slow recovery in domestic demand, which has hindered economic growth. It also noted that inflation is beginning to stabilize, and the increase in household debt is gradually slowing as the housing market in the greater Seoul area cools.

The decision to lower the rate comes amidst growing uncertainties facing South Korea’s trade-dependent economy, including the escalating crisis in the Middle East, which could affect fuel prices, exchange rates, and public utility costs. The BOK indicated that future economic growth will depend on the recovery of domestic demand, economic conditions in key global markets, and trends in information technology exports.

Furthermore, the bank projected that the growth of house prices and household debt would likely slow due to the strengthening of macroprudential policies intended to ensure the financial system’s stability. However, it emphasized the need to monitor potential risks associated with the reduced base interest rate and its effects on household debt. The BOK also revised its economic growth forecast for South Korea, projecting a growth rate of 2.4% for the year, down from 2.6% in 2023.

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