SEOUL, South Korea – South Korea's central bank cut its key interest rate for the first time in 15 months on Thursday, giving the government support to stimulate the economy dragged down by the shock of a ferry sinking.
Bank of Korea lowered its policy rate by a quarter of a percentage point to 2.25 percent for August. The bank had kept the rate unchanged since a rate cut in May 2013.
Most analysts had predicted the bank would lower borrowing costs to boost consumer sentiment, which was hurt by the shock from a deadly ferry sinking in spring. The sinking of Sewol ferry in April left 304 people, mostly teenagers on a school trip, dead and sent shockwaves to the nation for months. Consumer spending turned negative in the April-June quarter to the worst level in nearly three years.
Last month, Bank of Korea and the Finance Ministry lowered their growth outlooks for Asia's fourth-largest economy. According to the central bank, South Korea's economy will likely expand 3.8 percent this year instead of 4.0 percent while the finance ministry predicted 3.7 percent growth, revised down from the previous forecast of 3.9 percent.
Weak domestic spending has been a source of concern for policymakers. To encourage spending by consumers and companies, South Korea's new finance minister unveiled last month stimulus plans that included easing mortgage rules to stimulate the housing market. The government also announced a new tax policy to encourage companies to pay more dividends to investors and raise wages.
The central bank was expected to aid the government's stimulus moves as low inflationary pressure gave room for further easing.