BoK opts for rate cut for boosting growth rate

Due to fall in demand both in global and domestic market for Korean product, the Korean GDP is expected to slowdown in 2015. In order to avoid slower growth rate, the BoK followed its March 2015 rate cut with an additional 25bp reduction in its policy rate at its June meeting. This took it to 1.50%, one of its lowest ever levels. In his  statement, the Governor of the Central Bank stressed that the rate cut was motivated by the potential economic consequences of the epidemic. The cut came against a background of very low inflation (0.5% on average since the beginning of the year, well below the target range of 2.5% to 3.5%). 

However, the central bank is unlikely to make further cuts in its policy rate over the coming months, as it is constrained by the high level of household debt, which represents 160% of GDP, according to BNP Paribas.

At the same time, the government announced a package of five measures designed to support the economy, which will come into effect in the second half of 2015. In its press release of 30 June, the government stressed that economic policy will be "expansionary for as long as the economic recovery has not been consolidated", sending a stronger signal than usual of its support for the economy. 

The first measure consists of an additional stimulus programme of KRW15 trillion (1% of GDP), designed notably to increase health spending and support the sectors most directly affected by the epidemic (tourism, services), notes BNP Paribas.