A file picture on Bank of Korea Governor Lee Ju-yeol. [Yonhap News Photo]
In an unexpected action aimed at propping up economic growth, South Korea's central bank cut its base rate Thursday to a fresh record low of 1.25 percent, marking the first rate cut in 12 moths.
The rate for June was slashed by 25 basis points, surprising market watchers who had widely expected the Bank of Korea (BOK) to maintain its cautious monetary policy amid signs of economic improvement in Asia's fourth-largest economy.
The rate cut came a day after South Korea announced active fiscal policy actions and the creation of a new fund with contributions from the central bank to speed up a wave of massive corporate restructuring which has threatened to undermine South Korea's economic growth.
Financial officials have put their priority on expanding the capital of state-run lenders which need more loan loss reserves in pushing for the restructuring of indebted firms at the risk of straining South Korea's corporate debt market.
Many economists had forecast a BOK rate freeze, citing a possible US rate hike, but Federal Reserve System chairwoman Janet Yellen hinted this week at a more gradual rise.
The central bank said the domestic economy would sustain its trend of modest growth going forward despite weak consumption and sluggish exports, as US and European economies showed signs of improvement and China is expected to post moderate growth.
But there are "downside risks" caused by external economic conditions, it said, citing factors such as a US monetary policy and uncertainties in emerging markets and oil prices.
The central bank said it would conduct its monetary policy so as to maintain the recovery of economic growth while paying greater attention to stability in the financial markets.
Finance Minister Yoo Il-ho agreed that the rate cut would not be enough to spur economic growth further due to sluggish exports, though Asia's fourth-largest economy was heading for "modest recovery".
Aju News Lim Chang-won = cwlim34@ajunews.com
reporter
Park Sae-jin
swatchsjp@ajunews.com
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