Bank of Korea joins the global easing spree

Bundles of South Korean bank notes
Jung Yeon-Je | AFP | Getty Images
Bundles of South Korean bank notes

The Bank of Korea (BOK) on Thursday cut interest rates to a fresh record low, the latest central bank to jump on the easing bandwagon.

The surprise decision saw the BOK cutting its base rate for the first time in five months by 25 basis points to 1.75 percent.

The won extended its fall on the news, trading at a 20-month low of 1,133 against the U.S. dollar, while Seoul stock markets widened gains to rise 0.2 percent.

In comments to the media after the rate cut, which was not unanimous, BOK governor Lee Ju-yeol said the move was a "pre-emptive" measure as South Korea's economic rebound remained short of expectations.

"The recovery in domestic consumption was considerably weak... and if this weak momentum were to carry on it would eat into the economy's potential growth rate," said Lee, adding that the inflation rate, which fell to a 16-year low in February, will remain subpar.

"Although rates were lowered twice last year, we felt that more was needed to boost the momentum in the current recovery," he noted.

On the external environment, Lee said the global economy will continue to recover at a gradual pace, citing the prospect of a rate hike by the U.S. Federal Reserve as a risk event.

"Big variables going forward now will be when the Federal Reserve hikes rates and at what speed," he said.

More than 20 central banks around the world have embarked on monetary easing in the last few months, mostly to battle a disinflationary environment brought on by a collapse in oil prices. (check out the full list by Zerohedge here)

The BOK's move comes just a day after the Bank of Thailand also unexpectedly cut its benchmark interest rate for the first time in a year to 1.75 percent, the lowest level since mid-2010.

"Significantly lower inflation means that many Asian central banks can adopt a more dovish stance and yet end up with a higher real policy rate (defined as policy rate minus full year average headline inflation) in 2015 than in 2014," Santitarn Sathirathai, analyst at Credit Suisse, said in a recent note.

"Together with more comfortable current account positions (except in Malaysia), this means Asian central banks have greater room to cut rates or at least pause their hiking cycle," he added.

More BOK cuts to come?

Still, most analysts believe the BOK is done in its easing cycle for the near term.

"A key concern that will keep it from lowering rates further is Korea's high household debt burden and the recent acceleration in household credit growth following earlier rate cuts," said Krystal Tan, Asia Economist with Capital Economics, in a note.

ANZ doesn't see a rate cut in April's policy meeting but says the "risk of another rate cut in the second quarter has risen."

"The trajectory [for further moves] will be highly data dependent and the BOK will adopt a wait-and-see approach. If growth momentum deteriorates significantly, we will review our current policy call promptly," said wrote ANZ analysts Raymond Yeung and Louis Lam.