South Korea's top central banker on Thursday signaled reservations toward additional rate cuts after lowering the policy rate to the lowest in nearly four years.
Bank of Korea (BOK) Governor Lee Ju-yeol told a press conference after the August monetary policy meeting that the rate cut came as part of the "preemptive response" to the potential prolongation of soured sentiment among economic players and to prevent downside risks from becoming real.
The BOK lowered its benchmark seven-day repurchase rate by a quarter percentage point to 2.25 percent, altering the rate first in 15 months. It was the lowest since November 2010 when the bank raised it by 25 basis points to 2.5 percent.
Given the rate nearing to a record low, the central bank was not expected to cut rates further unless devastating crises, such as the global financial crisis, break out again. The BOK lowered the benchmark rate to the record low of 2 percent in February 2009 to alleviate the negative effect from the global financial crisis.
The 25-basis-point cut would be enough to "preemptively" tackle the economic slowdown, considering the recent economic indicators showed signs of recovering.
Industrial output grew the most in more than three years in June, and production in the service sector, which was hit hardest by the ferry disaster, expanded 1.6 percent in June after rising 0. 5 percent in May.
Job growth rebounded first in five months in July due to recovery in the service sector, especially the wholesale & retail and food & lodging industries. Exports advanced 5.7 percent on year in July, up from a 2.5 percent increase in June.
Business confidence fell to the six-month low this month amid lingering concerns over weak private consumption, but it could rebound as early as next month on the back of implementation of both fiscal and monetary stimulus.
The new economic team, led by Finance Minister Choi Kyung-hwan, unveiled a fiscal stimulus package last month, including a 40.7 trillion won (39 billion U.S. dollars) worth of fiscal expenditure form the second half of this year.
Governor Lee said the 25-basis-rate cut would boost the economic growth rate by 0.05-0.1 percentage point this year according to the BOK's past analysis. The fiscal stimulus will raise the growth rate further in 2014.
In July, the finance ministry revised down its 2014 growth outlook for the economy to 3.7 percent from an earlier estimate of 4.1 percent. The BOK downgraded its growth outlook for 2014 by 0.2 percentage point to 3.8 percent.