South Korea cuts key interest rate

South Korea's central bank cut its key interest rate by 25 basis points to 2.75 percent in response to a stronger-than-than-expected deceleration in economic growth. The second cut in three months came on the back of downward revisions of the country's 2012 growth forecast and data showing a significant slump in exports and manufacturing activity. A similar 25 basis point reduction in July had marked the first policy easing by the Bank of Korea (BOK) since early 2009. "With inflation well under control, the argument in favour of this rate cut to shore up growth was overwhelming," said Frances Cheung, a senior strategist at Credit Agricole CIB in Hong Kong, on Thursday. "But I think that will be it for a while, with the central bank holding off any any further cut this year," Cheung said. South Korea's export-driven economy has faltered in recent months, as the global economic downturn -- and in particular the crisis in the eurozone -- has hit overseas shipments. Korean exports fell year-on-year for the third consecutive month in September while manufacturing activity in the same month contracted at the sharpest rate for nearly four years. The HSBC Purchasing Managers' Index for September stood at a seasonally adjusted 45.7, compared with 47.5 the previous month. A reading above 50 indicates expansion in manufacturing activity, while a reading below that level signals contraction. Domestic demand is also showing signs of weakness, with retail sales steadily falling since May. On Tuesday, the International Monetary Fund cut its 2012 growth forecast for Korea to 2.7 percent, just weeks after lowering its estimate from 3.25 to 3.0 percent. The BOK is expected to cut its own forecast -- currently at 3.0 percent -- when it unveils a new outlook later Thursday. "There was a consensus that the BOK should have cut the (interest) rate in September. South Korea's rate has been relatively high after central banks in other countries slashed rates earlier this year," said Kim Soo-Man, analyst at IBK Investment and Securities. "What's most important to watch from now on is the situation in Europe, regarding Spain and Greece. If the situation there worsens, the BOK may cut the rate again but I don't see that anytime soon," Kim said. The South Korean government has been moderate in its fiscal support for the economy, apparently seeking to retain some firepower in case the global slowdown deepens. It has unveiled two stimulus packages since June, totalling 13.1 trillion won ($11.8 billion), or 1.0 percent of gross domestic product. The inflation rate accelerated to 2.0 percent in September, but remained comfortably below the central bank's target of 3.0 percent. The BOK said Thursday that it was setting its inflation target band for 2013-2015 at between 2.5 and 3.5 percent. "Due to the protracted sovereign debt crisis in Europe, we don't expect demand-pull inflation pressure to be high for the time being," it said in a statement.