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Bank of Korea Cuts Interest Rates in Surprise Move

Bank of Korea headquarters in Seoul
SeongJoon Cho | Bloomberg | Getty Imagess
Bank of Korea headquarters in Seoul

South Korea's central bank cut interest rates for the first time in seven months on Thursday, confounding the expectations of most market analysts that it would leave rates unchanged as recent economic indicators suggested that growth for Asia's fourth-largest economy remained subdued.

The Bank of Korea's monetary policy committee cut its base rate by 25 basis points to 2.50 percent, a media official said without elaborating. Governor Kim Choong-soo is due to hold a news conference from 11:20 a.m. (0220 GMT).

Thursday's decision brought interest rates to their lowest since early 2011.

(Read More: South Korea BOK Warns of High Default Risks in Three Sectors)

Ten out of 26 analysts surveyed by Reuters before the decision forecast the Bank of Korea would lower interest rates as the economy is still dragging its feet. The remaining 16 saw a rate hold.

Lead June futures for three-year government bonds rallied following the rate decision and was up 0.28 points at 107.28 by 0126 GMT. Local stocks also extended their gains following news of the fresh monetary stimulus.

"This month's rate cut means that the Bank of Korea admits that the economy is not as good as they think," said Jun Min-kyoo, economist at Korea Investment & Securities, tipping for possibly additional rate cuts in July and September.

(Read More: South Korea Pulls Off Decent Growth, but What's Missing?)

The Bank of Korea's decision comes after central banks in Europe and Australia lowered rates and both left the door open to more cuts.

It also comes just two days after South Korea's parliament approved a supplementary government budget calling for 5.3 trillion Korean won in fiscal stimulus, mostly aimed to create jobs and support smaller businesses.

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