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June 23, 2017

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S. Korea moves to cut interest rates to 2.25%

SEOUL--South Korea's central bank cut interest rates for the first time in 15 months Thursday, under growing government pressure including warnings of recession from the new finance minister.

The Bank of Korea (BOK) cut its benchmark overnight inter-bank loan rate by 25 basis points to 2.25 percent — the lowest since November 2010.

It was the first rate cut since May 2013.

The largely expected move came after the finance ministry last month unveiled a US$40 billion stimulus package and revised its 2014 economic growth forecast down from 4.1 percent to 3.7.

At the time, Finance Minister Choi Kyung-hwan warned that the national economy stood at a crossroads between "making a leap forward and falling into a recession."

The central bank has autonomy over monetary policy, but is known to have succumbed to government pressure in the past.

According to the BOK, the economy posted its slowest growth in more than a year in the second quarter, partly due to sluggish consumer spending following the Sewol ferry tragedy.

Gross domestic product rose a seasonally adjusted 0.6 percent in the April-June period from the previous quarter.

It was the slowest growth since the first quarter of 2013 and missed market expectations of around 0.7 percent.

Year-on-year, Asia's fourth largest economy expanded 3.6 percent, down from the previous quarter's 3.9 percent.

"Slowdown in domestic spending is worse than expected, as dampening of public sentiment is delaying recovery in spending," the BOK Governor Lee Ju-yeol said.

"We concluded that we needed to fuel momentum for growth by changing the sentiment," he told a press conference.

Supporting Growth Momentum

The central bank said in a statement that domestic consumption, hit earlier by the aftermath of the ferry disaster in April, had "not improved enough" since then.

"The monetary policy will be operated in ways to support the momentum for growth and ensure that inflation remains within our target range," it said.

Despite the latest rate cut, inflationary pressure will remain "not so significant for a while," it added.

Inflation has remained below two percent for nearly two years since November 2012 — and well below the central bank's target rate of 2.5 to 3.5 percent.

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