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Bank of Korea cuts interest rates for first time in 15 months

The Bank of Korea (BOK) cut interest rates for the first time in 15 months on Thursday, in a decision that was widely expected.

The central bank lowered its base rate by 25 basis points to 2.25 percent. Governor Lee Ju-yeol is due to hold a news conference at 11:20am local time.

Markets showed a limited response to the news. The won was up 0.1 against the dollar at 1,027.6 as of 0117 GMT. The Kospi Composite rose 0.4 percent.

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Analysts say the move is a sign the BOK is caving in to government pressure. Newly-appointed Finance Minister Choi Kyung-hwan has been pushing for looser monetary policy since the government unleashed a series of stimulus measures last month to support faltering growth.

"I think the move really reflects policy coordination between officials. What we're seeing is the government delivering stimulus late last month and now the BOK is contributing to the mix. We think this will help sustain an acceleration in growth and we think the GDP (gross domestic product) will rise at a faster rate of 3.4 percent this year," said Ronald Man, Asia Pacific economist at HSBC.

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South Korea - Asia's fourth-largest economy - has been grappling with massive household debt levels and a weak property market.

SeongJoon Cho | Bloomberg | Getty Images

The $39 billion fiscal stimulus package unveiled last month included property-boosting measures such as a loosening of the loan-to-value and debt-to-income ratios for home buyers and increasing the loan amount eligible for borrowers.

While Thursday's rate cut should provide an additional boost to the economy – which grew 0.6 percent in the second quarter from the three months before, the slowest rate in more than a year – analysts don't see further rate cuts for a while.

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"Today's rate cut is unlikely to mark the start of a prolonged period of policy-easing," Gareth Leather of Capital Economics said in a note.

"In fact, with growth likely to bounce back strongly in the second half of the year on increased government spending and faster exports, we wouldn't be surprised to see today's cut reversed early next year," he added.

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